iPI  I  I 

ill 


Eugene  D,  Towler  '17, 


THE 

MEANING  OF  MONEY 


BY 

HARTLEY   WITHERS 


"  Grau,  theurer  Freund,  ist  alle  Theoris 
Und  griin  des  Lebens  goldner  Baum.' 
GOETHE. 


NEW  YORK 

E.    P.     DUTTON     AND     COMPANY 

681    FIFTH    AVENUE 

1914 


PRINTFD  BV 

WILLIAM  CLOWES  AND  SONS,   LIMITED, 
LONDON  AND  BECCLES. 


PREFACE  TO  THE  THIkD  EDITION 

A  further  explanation  of  the  mysterious  expres- 
sions found  on  bills  of  exchange  has  been  added 
in  this  edition,  and  one  or  two  other  obscurities, 
to  which  the  writer's  attention  has  been  called  by 
kindly  critics,  have  been  made  clearer.  Slight 
modifications  have  also  been  made  in  certain  pas- 
sages concerning  gold  as  the  basis  of  credit,  which 
were  a  stumbling-block  to  a  theoretical  reviewer. 

Sept.  25, 1909. 


£603442 


PREFACE  TO  THE  SECOND  EDITION 

THE  promptitude— very  gratifying  to  the  author 
— with  which  a  Second  Edition  is  required,  gives 
an  early  opportunity  for  correcting  a  slight  mis- 
representation, contained  on  pp.  254-255  of  the 
First  Edition,  of  the  attitude  of  the  Bank  of  Eng- 
land with  regard  to  the  separation  of  the  bankers' 
balances  from  the  rest  of  the  Other  Deposits  in  its 
weekly  account. 

March  2,  1909. 


PREFACE   TO  THE   FIRST   EDITION 

THIS  book  is  designed  to  meet  the  difficulty 
experienced  by  the  average  reader  in  understand- 
ing that  part  of  a  newspaper  City  article  which 
deals  with  the  money  market.  It  has  been  com- 
piled with  as  little  reference  as  possible  to  other 
books,  and  chiefly  expresses  views  and  facts 
gathered  from  practical  men  at  work  in  the  great 
machine  which  it  describes,  one  of  whom  has 
kindly  read  the  proofs  and  made  valuable  sugges- 
tions. The  difficulties  of  the  subject  are  very  real 
to  its  writer,  who  has  consequently  aimed  earnestly 
at  clearness,  risking  platitude  and  iteration  to 
achieve  it.  Its  shortcomings  will  be  pardoned,  by 
considerate  readers,  on  the  ground  of  the  limited 
leisure  in  which  it  was  written. 

January,  1909, 


CONTENTS 

CHAPTER  I 

INTRODUCTORY 

PACl 

Different  senses  in  which  the  word  money  is  used  —  The 
money  of  daily  payments  and  the  money  of  the  money 
market — In  the  latter  sense,  money  means  the  loan  of 
money — The  money  market  is  the  place  where  money 
is  borrowed  :  and  most  of  its  business  consists  in  giving 
money  down  for  the  promise  of  money  some  day — It 
also  gives  money  here  for  money  somewhere  else,  through 
exchange  operations I 

CHAPTER  II 
COINED  CASH 

Gold,  silver,  and  bronze — Gold  the  most  potent,  and  why — 
Barter — The  kine  currency ;  its  defects  in  contrast  with 
the  advantages  of  the  gold  piece  —  The  comparative 
steadiness  of  the  value  of  gold  —  Its  universal  accept- 
ability in  economically  civilized  communities — Effect  of 
variations  in  the  available  amount  of  gold — Silver  not 
legal  tender  above  £2 ;  bronze,  not  above  one  shilling  .  9 


CHAPTEB    III 
PAPER  CASH 

Gold  economized  by  the  circulation  of  bank-notes,  or  bankers' 
promises  to  pay — Currency  based  on  mutual  indebtedness 


xii  CONTENTS 


between  bankers  and  the  public  —  Unfortunate  results 
of  faulty  working  of  the  system — Its  regulation  by  law, 
in  the  Bank  Act  of  1844 — Regulation  evaded  by  the  use 
of  cheques — Advantages  of  the  cheque,  and  its  risks — 
Not  legal  tender — Its  convertibility,  and  consequent  need 
for  a  gold  basis 23 


CHAPTER  IV 

THE  BILL  OF  EXCHANGE 

The  cheque  a  species  of  the  genus  bill  of  exchange — The 
difference  between  a  cheque  and  a  bill ;  time  the  chief 
element  in  the  bill — The  antiquity  of  the  bill — Don 
Quixote's  bill  of  ass-colts — Acceptance — A  concrete  ex- 
ample of  a  bill  drawn  against  wheat  sold — The  beauties 
of  the  genuine  bill — Anticipatory  bills  —Finance  bills — 
House  bills 37 

CHAPTER  V 

THE  MANUFACTURE  OF  MONEY 

The  right  to  draw  a  cheque  generally  created  by  an  advance 
made  by  a  banker — A  specimen  balance-sheet — Current 
and  deposit  accounts—  Nearly  three-quarters  of  the 
deposits  created  by  loans  and  discounts — The  process 
traced — Parable  of  a  little  local  bank — Banks  and  their 
public— The  cash  reserve — Fixed  by  law  in  the  United 
States — Breakdown  of  American  banking  in  1907  .  .  56 


CHAPTER  VI 

LONDON  THE  WORLD'S  MONETARY  CLEARING  HOUSE 

The  world-wide  money  market — International  money  must 
be  immediately  and  unquestionably  convertible — Money 
only  so  in  London — Limited  convertibility  in  France; 


CONTENTS  xiii 

?AGB 

Germany;  New  York  —  The  draft  on  London  the  cash 
of  international  commerce — London's  readiness  in  lend- 
ing— The  elasticity  of  the  English  system — London's 
responsibility — Its  foreign  customers  —  An  American 
opinion — The  crisis  of  1907  :  its  apparent  lesson  ;  quali- 
fied by  a  doubt — World-wide  responsibility  faced  by 
London 85 


CHAPTER  VII 

THE  CHEQUE-PAYING  BANKS 

The  banks  distinguished  and  defined  —  The  early  days  of 
banking  —  Their  romance  and  humours  —  Joint-stock 
banking — Good  effects  of  publicity — Its  extension  desir- 
able— Lord  Goschen  and  monthly  statements — A  partial 
reform — Banking  by  branches — Its  advantages,  and  a 
drawback — The  banks  usually  regulate  the  price  of  money 
in  London  and  the  market  rate  of  discount ;  provide 
credit  for  Stock  Exchange  operations  —  The  great 
importance  of  their  functions  .*.«••  107 


CHAPTER  VIII 

THE  BILL-BROKERS  AND  DISCOUNT  HOUSES 

t 

Originally  mere  intermediaries— Elementary  explanations  of 
discount  market  terms — The  brokers'  problem  :  the 
immediate  outlook;  the  future  prospect;  chances  of 
variation ;  Government  finance ;  speculation ;  foreign 
demands ;  international  politics 138 


CHAPTER  IX 
THE  ACCEPTING  HOUSES  AND  FOREIGN  BANKS 

Accepting  houses  developed  out  of  merchant  firms— Not 
bankers,  in  the  cheque-paying  sense— Importance  of 


xiv  CONTENTS 


their  function ;  partially  dependent  on  the  banks — The 
banks  themselves  large  acceptors — Colonial  and  foreign 
banks — Foreign  trade  pushed  with  the  help  of  English 
credit — Effect  on  English  trade  —  Foreign  credits  and 
London's  gold 157 


CHAPTER  X 

THE  FOREIGN  EXCHANGES 

Fluctuations  in  exchanges  due  to  variations  in  relative  value 
of  currencies  in  different  centres — These  variations  due 
to  balance  of  trade  in  its  widest  sense  and  the  rate  of 
interest  ruling — London  and  Sydney — London  and  Paris 
— Foreign  exchanges  the  mechanism  for  the  settle- 
ment of  international  indebtedness — How  this  indebted- 
ness arises — England  and  the  United  States — Balance 
settled  by  gold  shipments,  modified  by  finance  bills — 
Effect  on  exchanges  of  purchase  and  sale  of  securities — 
Loan  issues  —  Italy's  purchases  of  its  own  debt — The 
rate  of  discount  and  the  exchanges — Need  for  regulation 
of  discount  rate  . 173 


CHAPTER  XI 

THE  BANK  OF  ENGLAND 

Keeper  of  the  nation's  balance— Privilege  of  note  issue — The 
bankers'  bank — Provides  emergency  currency,  Peel's  Act 
having  been  evaded  by  the  use  of  cheques,  based  on 
credits  in  the  Bank's  books— Keeper  of  the  gold  reserve 
— An  expensive  responsibility — The  external  problem — 
Foreign  demands  created  by  credits  given  by  the  other 
banks — Summary  of  the  Bank's  functions — Its  organiza- 
tion— Court  of  Directors — Government  by  rotation — The 
test  of  results — The  Bank  of  France  .  199 


CONTENTS  xv 

CHAPTER  XII 

BANK  RATE  AND  MARKET  RATE 

MM 

What  Bank  rate  means — Seldom  effective  in  normal  times — 
Lack  of  connection  between  Bank  rate  and  market  rate- 
Has  to  be  remedied  by  the  Bank's  borrowing— A  clumsy 
and  artificial  process — Regulation  of  market  rate  at 
times  essential — Absence  of  control  exemplified  by  events 
of  the  summer  of  1908 — Connection  between  Bank  rate 
and  market  rate  might  be  established  by  agreement 
among  the  banks,  without  sacrifice  of  elasticity  .  .  223 

CHAPTER  XIII 

THE  BANK  RETURN 

A  specimen  of  its  form — The  Issue  Department — The  fidu- 
ciary issue  —  The  metallic  basis  ;  silver  in  the  Issue 
Department — The  Bank's  capital — The  Rest — The  Public 
and  Other  deposits — The  bankers'  balances — Suggestion 
for  their  separate  publication — Obscurity  on  the  assets 
side — Government  and  other  securities — The  Reserve 
—Consists  chiefly  of  notes,  which  are  to  some  extent 
based  on  securities 242 

CHAPTER  XIV 

THE  GOLD  RESERVE 

The  alleged  inadequacy  of  the  metallic  basis  on  which 
English  credit  and  currency  are  manufactured — The 
basis  of  credit  consists,  to  a  considerable  extent,  of 
credit — The  bankers'  balances  at  the  Bank  are  repre- 
sented as  to  about  fifty  per  cent,  by  cash,  which  consists 
chiefly  of  notes,  about  one-third  of  which  is  represented 
by  securities — Suggestions  for  increasing  the  gold  basis 
of  our  credit  system — Gold  to  be  increased  must  be 
brought  in  from  abroad — Most  easily  and  effectively,  by 


xvi  CONTENTS 

PACK 

higher  discount  rate,  to  be  arrived  at  by  reduction  of 
over-extended  credits  by  the  banks — For  this  purpose, 
publicity,  if  applied  to  all  and  at  all  times,  would  probably 
suffice 263 

CHAPTER  XV 

OTHER  RESERVES 

The  psychological  reserve,  based  on  confidence  in  our  bankers 
— Readability  of  assets — The  experience  of  the  1907 
crisis  and  its  lesson — Our  free  gold  market  also  a  reserve, 
since  it  makes  London's  safety  the  interest  of  foreigners 
who  use  its  facilities — Foreign  assistance  a  weak  and 
slow-working  support 284 

CHAPTER  XVI 
SUMMARY  AND  CONCLUSION 295 

INDEX 301 


THE    MEANING    OF    MONEY 


CHAPTER  I 

INTRODUCTORY 

THE  meaning  of  Money  is  not  a  question  of 
economic  theory.  The  object  of  this  volume  is  to 
explain  a  matter  of  plain,  positive,  practical  fact, 
which  is  very  important,  very  dull  and  very  little 
understood ;  and  to  do  so  as  clearly  as  may  be,  and 
with  the  least  possible  use  of  the  alarming  appara- 
tus which  generally  affrights  the  casual  reader  who 
opens  a  book  on  a  monetary  subject.  No  columns 
of  statistics  will  be  paraded  and  deployed,  the  use 
of  diagrams  will  be  sedulously  avoided,  and  as  far 
as  possible  figures  will  be  ruled  out. 

The  word  Money  is  associated  with  much  con- 
fusion and  difficulty  in  the  minds  of  those  who 
have  not  been  obliged  to  think  the  matter  out, 
because  of  the  different  senses  in  which  it  is  used. 
In  one  sense  it  is  perfectly  simple,  without  the 
least  reflection  or  examination.  Everybody  under- 
stands money  in  the  sense  of  the  pounds,  shillings, 
and  pence  that  we  pay  in  the  shape  of  coin,  notes  or 

B 


2  THE  MEANING  OF  MONEY 

cheques  for  everyday  wants.  But  the  other  most 
common  use  of  the  word  leads  to  complication, 
because  in  its  second  sense  money  means  not 
money,  but  the  loan  of  money. 

This  is  the  sense  in  which  the  word  is  used 
when  we  speak  of  a  money  market  or  a  price  of 
money,  phrases  which  are  wholly  incomprehensible 
to  those  to  whom  this  difference  of  meaning  is  not 
made  clear.  Any  one  who  defines  money  roughly 
as  a  sovereign  in  his  pocket,  with  which  he  can 
buy  whatever  he  wants  up  to  the  extent  of  its 
purchasing  power,  does  so  quite  naturally,  for  this 
is  its  most  obvious  meaning.  But  having  got  this 
meaning  into  his  head,  he  is  unable,  and  again 
quite  naturally,  to  understand  strange  expressions 
in  the  newspapers  which  tell  him  that  money  is 
cheap  or  that  the  money  market  is  tight.  He  knows 
that  the  price  of  a  thing  is  the  number  of  sovereigns, 
or  fractions  of  a  sovereign,  that  it  will  fetch.  He 
also  knows  that  no  one  will  give  him  more  than  a 
sovereign  for  the  sovereign  that  he  has  in  his 
pocket,  and  he  is  equally  convinced  that  the  most 
cunning  sophistries  of  the  most  skilful  dialectician 
would  never  induce  him  to  part  with  it  for  less.  He 
therefore  proceeds  triumphantly  to  the  conclusion 
that  it  is  nonsense  to  talk  about  a  price  for  money, 
and  his  argument  is  perfectly  sound  on  the  premises 
from  which  he  starts. 

His  mistake  arises  from  the  fact  that,  as  .has.  been 


MONEY  OF  THE  MARKET  3 

stated,  money  is  often  used  in  a  quite  different 
sense,  namely,  the  loan  of  money ;  or  perhaps  the 
matter  can  be  made  still  clearer  if  we  express  it  by 
saying  that  the  words  "price"  and  "market"  are 
Applied  in  a  different  sense  when  applied  to  money 
from  their  meaning  in  connection  with  any  ordinary 
commodity.  The  price  of  a  hat  is  the  sovereign  that 
you  pay  to  become  its  owner ;  the  psko  of  money 
is  the  sovereign  or  sovereigns  that  you  promise  to 
pay  some  day  for  the  loan  or  temporary  use  of  it. 
The  market  in  wool  or  wheat  is  the  place  where 
you  can  buy  these  articles  from  the  assembled 
merchants  or  dealers.  The  money  market  is  the 
place  in  which  you  can  borrow  money. 

It  thus  becomes  apparent  that  the  phrase  which 
has  proved  a  stumblingblock  to  so  many  genera- 
tions of  schoolboys  and  more  mature  students — 
that  money  is  a  commodity  which  can  be  bought  and 
sold  like  any  other— is  not  true.  Money  is  certainly 
a  commodity,  but  it  cannot  be  bought  and  sold  like 
any  other,  for  that  would  imply  exchanging  it  for 
itself,  since  buying  and  selling  are  nothing  but 
the  exchange  of  commodities  for  money,  as  distin- 
guished from  barter,  which  is  exchanging  commo- 
dities for  one  another.  Money  can  be  borrowed  or 
lent,  and  this  is  at  once  a  perfectly  reasonable  and 
comprehensible  transaction,  which  would  never 
cause  the  least  bewilderment  in  the  mind  of  the 
most  unmathematical  schoolboy.  It  is  perfectly 


4  THE  MEANING  OF  MONEY 

clear  to  Jones,  minor,  that  it  might  be  to  his  advan- 
tage, in  the  lean  and  hungry  days  towards  the  end 
of  term,  to  take  five  shillings  in  hard  cash  and  to 
promise  to  pay  seven-and-six  after  the  holidays, 
when  everybody's  pocket  is  bursting  with  metallic 
evidences  of  family  affection.  And  this  transaction, 
allowance  being  made  for  local  and  psychological 
variations,  is  a  fair  specimen  of  the  business  done 
every  day  in  Lombard  Street  and  in  the  other 
money  markets  of  the  world. 

The  money  market,  then,  is  the  place  in  which 
money~down  is  exchangecTfbr  the  promise  of  money 
some  day.  And  as  the  borrower,  the  man  who 
wants  money  down,  must  obviously  offer  the  lender 
an  inducement  to  let  him  have  it,  it  will  always  be 
found  that  the  amount  of  money  promised  some  day 
by  the  borrower  is  bigger  than  the  amount  of  money 
paid  down  by  the  lender.  The  difference  between 
the  two  figures  is  the  rate  of  interest,  which  is  often 
loosely  and  confusingly  described  as  the  price  of 
money. 

This  rate  of  interest,  as  every  one  knows,  is  cal- 
culated "per  cent.,"  so  much  on  each  ^"100  borrowed. 
If  you  borrow  £1000  for  a  year  from  your  banker, 
and  he  charges  you  3  per  cent,  or  £3  per  £100 
for  the  advance,  he  will  give  you  the  right  to  draw  a 
cheque  now  for  £1000,  or  to  withdraw  this  amount  in 
coin  or  notes,  and  at  the  end  of  the  year  you  will 
owe  him  £"1030.  But  this  simple  statement  of  the 


MONEY  SOME  DAY  5 

matter  is  complicated  slightly  in  usual  practice, 
because  the  interest  is  probably  payable  periodi- 
cally at  the  quarter  or  half-year.  This  complication 
becomes  important  in  the  case  of  loans  for  long  or 
indefinite  periods,  but  the  broad  fact  remains  that 
the  chief  operations  of  the  money  market  consist 
of  giving  cash  down  in  return  for  the  promise  of  a 
little  more  cash  some  day,  or  of  annual  or  half- 
yearly  cash  payments. 

Time  is  thus  the  distinctive  element  in  the  most 
ordinary  and  obvious  transactions  of  the  money 
market,  and  clears  away  the  difficulty  which  besets 
those  who  cannot  understand  how  a  money  market 
can  exist.  To  exchange  money  for  money  would 
be  absurd;  to  exchange  money  now  for  more 
money  some  day  is  evidently  a  quite  reasonable 
convenience  to  a  borrower  who  hopes  to  make 
a  profitable  use  of  the  sum  borrowed,  and  to  earn 
more  by  its  employment  than  the  price  that  he  will 
have  to  pay  for  it.  And  space  is  the  other  element 
which  accounts  for  the  rest  of  the  market's  opera- 
tions. Besides  giving  and  taking  money  down  in 
return  for  money  some  day,  it  is  also  engaged  in 
giving  and  taking  money  here  for  money  some- 
where else.  Hence  arises  the  complicated  and 
difficult  mechanism  of  what  is  generally  called 
"  exchange,"  which  also  becomes  a  comparatively 
simple  matter  when  it  is  clearly  expressed  and 
freed  from  confusing  technicalities.  The  broad 


6  THE  MEANING  OF  MONEY 

meaning  of  it  is  clear  enough,  if  you  reflect  that 
when  you  buy  a  postal  order  you  are  conducting 
an  exchange  transaction.  You  receive  a  communi- 
cation from  a  tradesman  in  a  town  in  which  you 
formerly  lived  to  the .  effect  that  his  account, 
amounting  to  five  shillings,  has  been  long  out- 
standing, and  that  he  would  be  glad  to  have  it 
settled.  The  five  shillings  are  ready  enough  in 
your  pocket,  but  the  question  is,  how  to  get  them, 
for  example,  from  London  to  Bristol.  You  can  put 
two  half-crowns  in  an  envelope,  register  it,  and 
so  send  your  money  at  the  cost  of  threepence. 
But  the  cheaper  and  more  convenient  method  is  to 
pay  some  one  who  has  money  in  Bristol  something 
to  induce  him  to  pay  your  debt  for  you  there. 
That  some  one  is  ready  in  the  person  of  the  Post 
Office,  which  sells  you  an  order  for  five  shillings, 
payable  at  any  office  in  the  United  Kingdom,  for 
five  shillings  plus  a  penny.  You  put  the  order  in 
an  envelope  and  send  the  money  at  a  total  cost  of 
twopence,  and  your  tradesman  presents  it  at  the 
Bristol  post-office  and  receives  cash.  Thus  you 
have  carried  out  an  exchange  transaction,  which 
may  be  technically  expressed  by  saying  that  you 
have  bought  a  draft  on  Bristol,  and  forwarded 
it  to  your  creditor,  and  that  it  has  been  met  on 
presentation. 

Monetary  transactions  may  thus  be  divide^  into 
three  main  divisions : — 


MONEY  HERE  AND  NOW  7 

(1)  Those  in  which  money  is  exchanged  for  any 
kind  of  commodity  or  §?fvice ;  ordinary  buying  or 

selling  operations. 

(2)  Those  in  which  money  down  is  exchanged 
for  the  promise  of  money  some  day ;  these  include 
all  kinds  of  loan  operations,  from  the  discounting  of 
a  bill  due  sixty  days  hence  to  an  issue  of  a  war 
loan  by  the  British  Government 

(3)  Those  in  which  money  here  is  exchanged  for 
money  somewhere  else;    and  these  are  exchange 
operations,  which  have   been  crudely  exemplified 
by  the  purchase  of  a  postal  order,  but  are  by  far 
the  most  complicated  kind  of  monetary  business, 
including  such  transactions  as  turning  sovereigns 
into  Shanghai  taels,  composed   of  silver,   or  into 
inconvertible   paper  notes,  issued  by  some  South 
American  Republic. 

It  will  be  observed  that  in  all  three  there  is 
one  constant  factor,  which  is  money  here  and  now, 
or  cash.  In  ordinary  buying  and  selling  cash  is 
exchanged  for  goods  or  services,  as  when  we  buy  a 
pair  of  gloves  across  the  counter  of  a  shop,  or  send 
a  reluctant  cheque  to  pay  a  dentist's  account  or 
a  lawyer's  bill  of  costs.  In  loan  operations  cash  is 
exchanged  for  some  form  of  security  or  promise  to 
pay.  In  exchange  operations  cash  is  exchanged 
for  drafts  representing  a  right  to  money  in  some 
other  place.  And  before  we  can  go  any  further, 
it  will  be  necessary  to  give  some  explanation  of  the 


8  THE  MEANING  OF  MONEY 

different  forms  taken  by  cash,  or  money  here  and 
now.  Everybody  knows  that  when  a  payment  is 
to  be  made  it  will  take  the  form  of  coin,  Bank  of 
England  notes,  or,  most  probably,  a  cheque  drawn 
on  a  banker ;  and  the  stages  by  which  these  forms 
of  payment  came  into  being  are  a  well-worn  story, 
which  must  be  summarized  briefly  in  the  interests 
of  clearness  and  completeness. 


CHAPTER   II 

COINED  CASH 

THE  most  obvious  of  the  forms  of  cash  is  the  coined 
currency  that  we  carry  in  our  pockets,  consisting 
of  gold,  silver,  and  bronze  discs,  stamped  with  the 
image  and  superscription  of  the  king,  and  milled 
round  the  edges  to  prevent  enterprising  bullionists 
from  shaving  metal  off  their  rims.  This  pre- 
caution, it  will  be  observed,  is  not  considered 
necessary  in  the  case  of  the  penny. 

The  most  potent  of  these,  in  extracting  goods 
and  services  from  mankind,  is  gold.  Since  the 
purpose  of  this  volume  is  an  endeavour  to  make 
money  matters,  as  they  are,  clear  and  comprehen- 
sible, there  is  no  need  to  enter  into  a  historical 
dissertation  on  the  steps  which  have  raised  gold 
into  its  position  as  the  most  important  medium  of 
exchange,  legal  tender  to  any  amount,  and  con- 
sequently, as  we  shall  see  later,  part  of  the  basis 
of  credit  in  England  and  in  economically  civilized 
countries.  But  the  more  obvious  reasons  which 
produced  this  result  may  be  enumerated.  We  have 
already  seen  that  buying  is  distinguished  from 


io  THE  MEANING  OF  MONEY 

barter  by  being  an  exchange  of  goods  for  money 
instead  of  an  exchange  of  goods  for  goods.  The 
inconvenience  of  a  state  of  barter  is  evident  on  a 
moment's  reflection,  and  it  need  not  be  said  that 
as  long  as  it  prevailed  commercial  progress  was 
almost  impossible.  The  sad  state  of  the  hungry 
hatter,  unable,  in  the  days  of  barter,  to  get  meat 
because  the  butcher  wants  not  hats  but  boots,  is 
a  commonplace  of  the  economic  text-books,  and 
it  is  clear  at  once  that  a  long  step  forward  has 
been  taken  when  a  community  agrees  to  recognize 
one  commodity  as  always  acceptable  in  payment 
for  others,  so  that  any  capitalist  who  is  possessed 
of  a  store  of  it  may  always  rely  on  being  able  to 
convert  it  into  whatever  he  needs  that  is  produced 
by  his  fellows.  It  is  also  evident  that  the 
commodity  selected  had  to  be  endowed  with 
certain  qualities,  chief  among  which  were  that  it 
should  be  lasting,  easy  to  pass  from  hand  to 
hand,  and  fairly"  uniform,  .that  is,  with  not  too 
great  a  difference  in  size  and  desirability  between 
its  various  examples.  The  Old  Testament  story 
shows  that  in  the  primitive  society  depicted  by  it 
a  man's  wealth  was  gauged  by  the  size  of  his  flocks 
and  herds  and  the  number  of  his  changes  of 
raiment,  and  in  the  Homeric  poems  fine  suits  of 
armour  are  valued  by  the  number  of  kine  that  they 
would  fetch.  Other  instances  of  the  use  of  articles 
of  common  consumption  as  currency  include 


FROM  BARTER  TO  MONEY  11 

tobacco,  hides,  shells,  bullets  and  nails.  But  the 
prevalence  of  beasts  was  sufficient  to  lead  etymolo- 
gists to  consider  at  one  time  that  the  Latin  word 
for  a  beast,  pecus,  had  been  enshrined  in  the  name 
for  money,  petunia,  which  has  come  down  in  English 
in  the  forms  pecuniary  and  impecunious.  This 
derivation  is  now  abandoned,  comparative  philology 
having  decided  that  pecunia  is  the  same  word  as  the 
English  "  fee,"  and  is  chiefly  memorable  for  having 
prompted  a  passage,  full  of  vivid  fancy  and  inspira- 
tion, in  Carlyle's  "  Sartor  Resartus."  "  A  simple 
invention  it  was,"  says  Herr  Teufelsdrockh,  "  in 
the  old-world  Grazier — sick  of  lugging  his  slow  Ox 
about  the  country  till  he  got  it  bartered  for  corn  or 
oil — to  take  a  piece  of  Leather,  and  thereon  scratch 
or  stamp  the  mere  Figure  of  an  Ox  (or  Pecus)',  put 
it  in  his  pocket,  and  call  it  Pecunia,  Money.  Yet 
hereby  did  Barter  grow  Sale,  the  Leather  Money 
is  now  Golden  and  Paper,  and  all  miracles  have 
been  out-miracled :  for  there  are  Rothschilds  and 
English  National  Debts  ;  and  whoso  has  sixpence  is 
sovereign  (to  the  length  of  sixpence)  over  all  men ; 
commands  Cooks  to  feed  him,  Philosophers  to 
teach  him,  Kings  to  mount  guard  over  him — to  the 
length  of  sixpence." 

The  ox  was  certainly  at  one  time  a  standard  of 
value,  though  it  may  be  doubted  whether  it  passed 
generally  as  currency,  even  stamped  on  leather, 
for  Carlyle's  hypothesis  really  requires  a  rather 


12  THE  MEANING  OF  MONEY 

advanced  stage  of  credit  organization,  with  token 
money  issued  by  graziers,  and  apparently  accepted 
by  a  trusting  and  economically  civilized  public. 
But  in  any  case  the  ox  must  have  been  singularly 
ill-adapted  for  currency  purposes ;  not  only  was  it 
not  lasting,  but  it  was  certain  to  deteriorate  after 
a  certain  age,  and  finally  to  perish ;  it  was  very  far 
from  portable,  as  Carlyle's  Grazier  found ;  and  the 
difference  between  one  ox  and  another  in  size, 
value,  and  other  respects  is  so  great  that  the  kine 
circulation  must  have  been  singularly  liable  to  the 
action  of  the  great  economic  principle  known  as 
Gresham's  Law,  under  which,  as  we  shall  see  later, 
bad  currency  drives  out  good. 

All  this  has  been  somewhat  laboriously  set 
forth,  because  in  these  respects  the  ox  is  the 
very  antithesis  of  the  gold-piece,  and  having  seen 
wherein  the  ox  failed,  we  have  already  grasped  the 
advantages  of  the  sovereign. 

The  sovereign  is  permanent,*  portable,  and  of 
universal  acceptability,  either  in  its  own  shape  or 
melted  back  into  its  original  bullion.  As  it  emerges 
from  the  Mint,  there  is  no  appreciable  difference 
between  it  and  its  fellows,  and  its  long  use  as  the 
standard  money  of  the  leading  commercial  nation 

*  Comparatively  permanent,  that  is.  It  is  not  wholly  impervious 
to  wear  and  tear,  and  M.  de  Launay,  in  his  work  on  "  The  World's 
Gold,"  estimates  that  a  gold  coin  would  entirely  disappear  in 
eight  thousand  years. 


THE  SOVEREIGN  13 

has  given  it  a  position  which  is  unrivalled  in  the 
present  and  unparalleled  in  the  past.  The  different 
experiences  to  which  one  sovereign  and  another 
may  be  subjected  make  a  difference  to  the  length  of 
time  during  which  they  preserve  their  full  weight, 
but  weight  rarely  becomes  a  question  of  practical 
importance  to  holders  of  the  sovereign  considered 
as  cash,  though  it  is  always  watched  carefully  by 
bullion  dealers,  who  regard  the  sovereign  merely  as 
a  piece  of  gold  that  may  be  melted  into  bars.  The 
coinage  is  now  so  well  cared  for  that  for  purposes 
of  inland  and  retail  exchange  one  may  be  taken  to 
be  as  good  as  another,  as  long  as  we  are  certain 
that  it  is  a  real  sovereign,  duly  stamped  and  milled. 
We  are  apt  to  take  this  inestimable  convenience  as 
a  matter  of  course,  but  it  is  only  secured  by  con- 
stant vigilance  on  the  part  of  the  responsible  authori- 
ties, and  throughout  the  Middle  Ages  untold  loss, 
inconvenience  and  uncertainty  was  caused  by  the 
chronically  chaotic  state  of  the  currency  in  this  and 
other  countries. 

In  those  good  old  days,  monarchs  who  did  not 
actually  debase  their  own  currencies  by  decreasing 
the  amount  of  true  metal  in  them,  and  then  passing 
them  to  their  unsuspecting  subjects,  were  regarded 
as  enlightened  and  disinterested  reformers ;  and  the 
imperfect  methods  of  coinage  employed  even  by 
the  best-intentioned  made  it  easy  to  sweat  and  clip 
the  coins,  that  is  to  say,  to  shave  bits  off  them  and 


14  THE  MEANING  OF  MONEY 

then  pass  them  on.  Here  came  in  the  opportunity 
of  the  bullion  dealer,  and  the  process  arose  which 
went  on  undetected  for  centuries  until  it  was 
enounced  and  denounced  by  Sir  Thomas  Gresham, 
Queen  Elizabeth's  great  monetary  adviser,  who 
stated  his  famous  economic  law  on  the  subject. 
The  gist  of  which  is,  that  if  two  coins  are  in  circu- 
lation, one  better  than  the  other,  the  good  one  will 
be  held  back  by  any  one  who  is  wise  enough  to 
recognize  its  merits,  and  the  bad  one  will  be  passed 
on ;  so  that  after  a  time  only  the  clipped  and  sweated 
coins  will  be  circulating  in  the  hands  of  the  public, 
and  the  full-weighted  ones  will  be  either  in  the 
vaults  of  the  bullion  dealers  or  melted  into  bars. 
To  protect  themselves  against  the  working  of  this 
law,  our  forefathers  used  sometimes  to  carry  a  small 
pair  of  scales,  with  weights  representing  a  guinea 
and  a  half-guinea,  fitted  into  a  neat  case  to  be  tucked 
into  the  pocket. 

It  has  been  claimed  for  gold,  that  one  of  its  great 
advantages,  which  helped  to  raise  it  to  its  position 
of  predominance  as  circulating  medium  and  basis 
of  credit,  is  its  steadiness  in  value.  It  is,  in  fact,  a 
common  delusion  that  the  value  of  gold  is  fixed  and 
never  varies.  The  value  of  gold  appears  to  be  fixed 
by  the  law  which  compels  the  Mint  to  take  any  gold 
that  is  brought  to  it  and  coin  it  into  sovereigns  at 
the  rate  of  £3  175.  10^.  per  oz.,  but  that  is  only 
another  way  of  expressing  the  fact  that  a  coined 


THE  ADVANTAGES  OF  GOLD  15 

sovereign  is  equivalent  to  so  much  gold ;  but  because 
we  are  accustomed  to  value  everything  in  sovereigns 
many  of  us  have  been  led  into  the  assumption  that 
gold  which  can  always  be  made  into  so  many 
sovereigns  per  oz.  must  therefore  be  unchangeable 
in  value.  But  if  we  keep  fast  hold  of  the  fact  that 
the  value  of  a  thing  is  what  it  will  fetch,  it  will  be 
seen  at  once  that  the  sovereign,  or  the  gold  from 
which  it  is  coined,  has  no  such  charmed  prerogative. 
When  wheat  is  355.  a  quarter  the  buying  power  of 
the  sovereign,  in  the  pocket  of  the  miller  who  wants 
to  buy  wheat,  is  different  from  its  value  when  wheat 
is  255.  But  though  the  value  of  gold  can  be  no 
more  fixed  than  that  of  anything  else,  at  the  same 
time  its  comparative  indestructibility,  and  the  enor- 
mous amount  of  it  in  existence  in  one  shape  or 
another,  make  its  value  depend  much  less  than  that 
of  most  other  things  on  the  amount  of  the  output 
at  the  moment. 

Wheat,  which  is  grown  to  be  consumed  straight- 
way, depends  for  its  price  on  the  prospects  of  the 
present  crop  and  the  amount  left  over  of  the  last ; 
gold,  which  is  mined  in  order  to  be  kept  in  the  form 
of  plate,  ornaments,  coins  and  ingots,  and  is  rarely 
abolished  by  consumption,  is  obviously  much  less 
dependent  on  the  chances  which  may  be  tending 
to  increase  its  amount  more  or  less  rapidly  than 
usual.  For  whatever  its  form,  it  may  always  be 
brought  out  and  melted,  and  so  come  into  the 


16  THE  MEANING  OF  MONEY 

market  in  the  shape  of  cash,  as  was  recognized  by 
the  prudent  Athenians  *  when  in  the  days  of  their 
prosperity  they  overlaid  the  statue  of  Athene  with 
gold,  giving  it  a  gorgeous  appearance  for  the  time 
being  and  leaving  a  reserve  which  could  at  any  time 
be  stripped  off  and  turned  into  the  sinews  of  war. 
Gold  thus  may  be  regarded  as  less  likely  to  fluctuate 
in  value  than  most  other  commodities  owing  to  the 
huge  accumulated  supply,  which  renders  the  new 
output  for  the  time  being  a  matter  of  comparatively 
little  importance;  and  this  fact,  which  has  some- 
times been  exaggerated  into  a  statement  that  its 
value  is  fixed,  has  certainly  contributed,  with  its 
beauty  as  decoration  and  its  commanding  merits  as 
currency,  to  the  universal  acceptability  of  gold,  in 
economically  civilized  countries,  in  payment  for 
goods  and  services. 

It  is  doubtless  a  mere  convention  that  gives 
gold  its  commanding  position,  and  it  may  be  con- 
tended that  it  would  be  much  simpler,  cheaper  and 
more  civilized  to  conduct  exchanges  by  means  of 
pieces  of  paper  secured  on  national  property,  as 
the  French  Revolutionists  tried  to  do  with  their 
assignats,  or  to  abolish  all  need  for  mediums  of 
exchange  and  help  ourselves  to  whatever  we  want, 
rendering  honest  service  in  exchange  by  the  mere 
impulse  of  our  own  consciences.  But  we  are  not 
concerned  at  present  with  any  theoretical  questions 
*  Thucydides,  ii.  13. 


THE  TEST  OF  ACCEPTABILITY  17 

of  an  ideal  currency  or  absence  of  currency.     The 


only  currency__lhat,  .isjof  .practical  and  .everyday 
importance  is  that  which  is  endowed  with  the 
virtue  of  universal  acceptability.  If  the  trading 
community  will  take  a  certain  piece  of  metal  every- 
where in  payment  for  its  goods  and  services,  that 
piece  of  metal  is  good  currency;  and  no  most 
scientifically  evolved  substitute  will  take  its  place 
until  it  has  won  its  way  to  the  possession  of  the 
same  virtue.  And  the  fact  cannot  be  gainsaid  that 
gold  is  the  one  commodity  which  is  universally  and 
at  all  times  acceptable  in  all  civilized  communities, 
and  that  all  forms  of  promise  to  pay,  or  paper 
money,  are  acceptable  in  proportion  to  the  readi- 
ness with  which  they  can  be  turned  into  gold.  And 
consequently  we  shall  find,  when  we  come  to  deal 
with  the  more  interesting  problems  of  the  manu- 
facture of  credit,  that  the  convertibility  of  credit 
into  gold  is  a  matter  that  its  manufacturers  always 
have  to  consider  and  allow  for  carefully,  and  that 
consequently  the  amount  of  gold  that  they  may 
possess  in  order  to  meet  credit  instruments  that 
come  in  for  conversion,  is  necessarily  a  very  im- 
portant factor  among  those  which  regulate  the 
amount  of  credit  that  they  can,  or  ought  to,  create. 
But  even  when  the  importance  of  gold  as  the 
universally  acceptable  medium  of  exchange  is  ad- 
mitted, it  is  often  denied,  by  economic  theorists  and 
other  critically-minded  observers,  that  the  amount 

c 


18  THE  MEANING  OF  MONEY 

of  available  gold  is  a  question  of  any  moment. 
In  theory  it  is  easy  to  argue  that,  if  the  amount  of 
gold  were  suddenly  doubled,  the  world  at  large 
would  not  be  a  penny  the  richer,  because  the 
buying  power  of  the  gold  would  be  halved,  the 
price  of  everything  would  be  doubled,  we  should 
have  twice  as  many  sovereigns  in  our  pockets,  and 
should  have  to  pay  twice  as  much  for  everything 
that  we  wanted.  But  I  venture  to  think  that  it  is 
easy  even  in  theory  to  push  this  contention  too 
far;  because  any  such  great  addition  to  currency 
and  credit  would  have  a  great  effect  in  stimulating 
production,  and  so  would  lead  to  a  great  addition 
to  the  number  of  real  goods  which  humanity  desires 
and  consumes  when  it  can  get  them.  In  so  far  as 
this  was  so,  the  condition  of  humanity  as  a  whole 
would  be  materially  improved.  Trade  would  be 
more  active,  and  the  many  borrowers  who  are 
almost  always  in  search  of  credit  for  the  promotion 
of  various  productive  enterprises  would  be  more 
easily  satisfied.  In  fact,  the  extent  to  which  trade 
and  economic  progress  have  in  the  past  been 
quickened  by  additions  to  the  supply  of  the  precious 
metals  has  produced  a  theory,  with  respectable 
authority  behind  it,  which  connects  the  develop- 
ment of  civilization  with  mining  activity.  Perhaps 
the  most  stalwart  and  uncompromising  exposition 
of  this  theory  is  given  by  Sir  Archibald  Alison 
in  his  "History  of  Europe."  "The  two  greatest 


EFFECT  OF  VARIATION  19 

events,"  *  he  says,  "  which  have  occurred  in  the 
history  of  mankind  have  been  directly  brought 
about  by  a  successive  contraction  and  expansion  of 
the  circulating  medium  of  society."  These  events 
were  the  fall  of  the  Roman  Empire,  which,  accord- 
ing to  Sir  Archibald,  "  was  in  reality  brought  about 
by  a  decline  in  the  gold  and  silver  mines  of  Spain 
and  Greece,"  and  the  Renaissance,  which  he  ascribes 
to  the  discovery  of  the  mines  of  Mexico  and  Peru. 

Between  these  two  theoretical  extremes — one 
maintaining  that  the  available  volume  of  the  precious 
metals  is  a  matter  of  no  importance,  the  other 
regarding  it  as  the  cause  of  the  most  momentous 
events  in  human  development— it  is  probably  safe 
to  steer  a  midway  course,  marked  by  the  buoys  of 
actual  fact.  Experience  shows  that  an  era  of  active 
gold  production  may  be  accompanied  by  a  fall  in 
the  prices  of  commodities,  either  because  the  multi- 
plication of  commodities  may  be  progressing  more 
rapidly  than  the  output  of  gold,  or  because  inactivity 
of  trade,  perhaps  due  to  some  shock  to  credit,  may 
be  checking  the  demand  for  commodities.  But  when 
the  more  normal  effect  of  increased  gold  supplies 
is  at  work,  and  the  prices  of  goods  are  rising,  the 
producers  of  the  goods  are  thereby  benefited,  and 
set^  to  work  harder  than  ever  to  produce  them. 
The  mechanism  of  transport  is  extended  and 
improved,  the  waste  places  of  the  earth  are  ploughed 
*  Vol.  i.  ch.  i.  §  33, 


20  THE  MEANING  OF  MONEY 

and  watered,  and  the  material  heritage  pf  mankind 
is  increased  and  multiplied.  So  much  so  that  the 
demand  for  credit  and"  capital  for  the  furtherance  of 
these  extensions  is  apt  to  become  so  keen,  that,  as 
we  saw  in  the  recent  period  of  great  commercial 
expansion,  an  era  of  active  gold  production  may 
coincide  withjiij^rates  for  money. 

It  is  thus  evident  that  innumerable  and  incalcu- 
lable considerations  have  to   be  enumerated  and 
calculated  before  we  can  say  with  certainty  either 
that  variations  in  the  amount  of  gold  are  of  no 
importance,  or  that  they  will  have  results  which 
can  be  definitely  counted  on.     But  for  the  purposes 
of  our  present  inquiry  there  is  no  need  to  wonder 
what  might  happen  if  the  available  gold  supply 
were  doubled ;  it  may  be  asserted  that,  rightly  or 
\      wrongly,  and  up  to  a  certain  point,  if  any  reasonably 
possible  addition  was  made  to  the  Bank  of  England's 
.store  of  gold,  the  event  would,  in  normal  times,  be 
'welcomed  by  the   commercial   community.      The 
/  position  of  the  Bank  would  be  regarded  as  stronger, 
\  the  City  would  be  cheerful  and  optimistic,  and  there 
J  would  be  so  much  more  credit  available  for  any 
/  borrower  who  had  an  enterprise  to  finance  and 
C    could  give  good  security.     If  there  were  no  enter- 
prising borrowers  with  good  security  to  offer,  the 
new  gold  would  certainly  be  useless.    But,  except 
in  times  of  extreme  slackness  in  trade,  this  is  an 
improbable  contingency ;  and  it  also  is  improbable 


SILVER  21 

that  extreme  slackness  in  trade  would  last  long,  if 
it  were  treated  with  sufficient  doses  of  this  medicine. 

We  are  thus  wandering  far  afield  from  our  con- 
sideration of  sovereigns  in  the  pocket  to  gold  as 
part  of  the  basis  of  credit.  But  these  monetary 
questions  are  all  so  inextricably  entangled  that  it 
is  almost  impossible  to  mark  them  off  logically  and 
deal  with  them  one  by  one.  It  is  the  universal 
acceptability  of  gold  in  civilized  communities  that 
gives  it  both  its  popularity  in  the  shape  of  sove- 
reigns, and  its  importance  as  a  wheel  in  the  ma- 
chinery of  credit.  And  this  importance  is  so  great 
that  it  had  to  be  referred  to  on  our  first  meeting 
with  the  metal  in  the  course  of  this  inquiry. 

The  small  change  that  we  carry  in  our  purses 
need  not  detain  us  long.  It  must  be  noted  that 
silver  coins  are  not  "  legal  tender  "  to  the  extent  of 
more  than  £2 ;  that  is  to  say,  if  you  owe  your  tailor 
£$>  you  cannot  legally  satisfy  the  debt  by  handing 
him  one  hundred  shillings  or  any  other  arrangement 
in  silver.  Probably  it  would  not  occur  to  you  to  do 
so,  and  if  you  did  he  would  probably  accept  it,  and 
the  restriction  is  not  apparently  of  much  practical 
importance.  Actually  it  is  most  important,  for  the 
dreary  record  of  currency  history  is  a  long  tale  of 
the  uncertainty  and  inconvenience  which  arose  in 
the  days  when  people  tried  to  keep  gold  and  silver 
circulating  on  equal  terms  at  a  fixed  ratio,  with  the 
result  that  the  one  which  happened  for  the  moment 


22  THE  MEANING  OF  MONEY 

to  be  less  valuable  as  bullion  continually  drove  out 
of  circulation  the  one  which  was  more  valuable, 
thanks  to  the  operation  of  Gresham's  Law*  and 
the  quick  and  cunning  bullion  merchants.  JBi-^ 
metallists  maintain  that  the  confusion  and  difficulty 
of  the  two-metal  system  only  arose  because  it  was 
not  scientifically  and  universally  applied,  and  Bi- 
metallism has  been  endorsed  by  eminent  theoretical 
authority.  The  simplicity  of  the  single  standard, 
however,  has  obvious  practical  advantages,  and  it 
may  at  least  be  claimed  that  England,  by  making 
silver  legal  tender  only  up  to  sums  of  £2,  and 
adopting  what  is  called  a  gold  standard,  solved  a 
problem  which  had  puzzled  the  civilized  world  for 
centuries. 

It  may  also  be  observed  that  our  silver  coins 
are  mere  tokens ;  that  is  to  say,  they  do  not  pretend 
to  contain  as  much  of  the  metal  as  would,  if  melted 
down,  fetch  as  much  as  the  value  at  which  they 
circulate.  At  the  present  moment  t  there  is  roughly 
about  fourpennyworth  of  silver  in  a  shilling,  which 
thus  has  a  purely  conventional  and  artificial  value 
as  currency. 

Bronze  coins  are  legal  tender  only  to  the  extent 
of  one  shilling. 

*  See  p.  14.  t  December,  1908. 


CHAPTER   III 

PAPER  CASH 

THE  exchange  of  a  hat  for  a  sovereign  is  a  quite 
commonplace  proceeding,  but  when  we  begin  to 
exchange  a  hat  for  a  piece  of  paper,  which  is  only 
accepted  because  it  is  believed  to  be  convertible 
into  gold,  the  element  of  belief,  that  is  to  say  of 
credit,  enters  into  the  transaction,  and  we  have 
moved  up  a  step  on  the  ladder  of  economic 
civilization. 

The  first  stage,  as  we  have  seen,  was  from 
barter,  by  which  goods  were  exchanged  for  goods 
to  purchase,  by  which  goods  were  exchanged  for 
one  commodity  of  universal  acceptability.  And  a 
process  of  painful  evolution  finally  decided  that 
gold  was  best  fitted  to  be  that  commodity.  But 
an  enormous  expansion  of  trade  was  made  possible 
when  it  was  discovered  that  gold  could  be 
economized  by  the  use  of  paper  which  represented 
and  multiplied  it,  and  when  confidence  in  a  banker 
became  sufficiently  established  to  induce  the  com- 
munity to  circulate  his  promises  to  pay  instead  of 
pieces  of  metal. 


24  THE  MEANING  OF  MONEY 

The  process  of  this  evolution,  also,  was  painful 
enough,  and  the  loss  and  uncertainty  caused  by  the 
bad  and  debased  coin  currency  of  the  Middle  Ages 
were  rivalled  by  the  ruin  and  disasters  of  the  early 
days  of  banking,  when  notes  were  issued  without 
any  regard  for  the  assets  which  were  behind  them, 
or  the  ability  of  the  issuer  to  meet  them  on  pre- 
sentation. Nevertheless,  the  appearance  of  the 
bank-note  marks  the  first  step  in  the  development 
of  banking  as  we  understand  it  nowadays,  that  is, 
of  a  machinery  for  the  manufacture  of  credit. 

Before  the  bank-note  won  its  way  into  circula- 
tion, such  bankers  as  existed  were  chiefly  gold- 
smiths and  bullion  dealers;  they  were  sometimes 
loan  mongers,  collecting  coin  from  one  set  of 
customers  to  lend  it  to  another,  or  to  discount  bills 
for  another,  but  it  was  only  when  they  began  to 
induce  those  who  borrowed  from  them  to  take  the 
cash  advanced  in  the  form  of  notes  that  the  economy 
of  metal  became  possible  and  the  wheel  of  the 
credit  machine  began  to  turn  to  any  purpose.  The 
original  goldsmith's  note  was  a  receipt  for  metal 
deposited.  It  took  the  form  of  a  promise  to  pay 
metal,  and  so  passed  as  currency.  Some  jngejjipus 
goldsmith  conceived  the  epoch-making  notion  of 
giving  notes,  not  only  to  those  who  had  deposited 
metal,  but  to  those  who  came  to  borrow  it,  and  so 
founded  modern  banking. 

As  long  as  the  bankers  took  care  of  coin  and 


THE  BANK-NOTE  25 

ingots  for  Jones  and  lent  them  to  Smith,  the  com- 
mercial community  was  given  a  certain  convenience, 
by  knowing  where  dealers  in  money  were  to  be 
found,  but  the  convenience  was  severely  restricted. 
When  the  bankers  lent  Smith  not  coin  but  a  promise 
to  pay  coin,  they  soon  discovered,  since  their 
promise  to  pay  did  not  at  once  come  back  to  them 
for,  presentation,  that  in  the  mean  time  they  might 
safely  accommodate  Brown,  Robinson  and  Williams 
with  a  similar  number  of  similar  promises  to  pay ; 
and  so  they  hit  on  the  great  device  by  which 
modern  commerce  transacts  its  business  by  means 
of  evidence  of  mutual  indebtedness  between  it  and 
its  bankers. 

At  first  sight  there  is  something  whimsical  in 
the  process  of  stimulating  production  and  expanding 
trade  by  an  agreement  between  two  parties  to  owe 
one  another  something;  but  this  agreement  is  an 
important  part  of  the  structure  of  the  modern 
edifice  of  credit. 

Let  us  see  it  at  work  in  the  case  of  the  primitive 
bank  which  we  are  now  supposing  to  be  emerging 
from  the  bullion-dealing  to  the  note-issuing  stage. 
At  first,  we  supposed  it  engaged  in  taking  care  of 
metallic  money  for  Smith  and  lending  it  to  Jones, 
and  its  balance-sheet  would  stand  thus,  if  we  leave 
out  its  capital  for  the  sake  of  simplicity  : — 

Due  to  Smith    .    .    £10,000    Loan  to  Jones    .    .    £10,000 


26  THE  MEANING  OF  MONEY 

After  it  had  made  the  momentous  step  of 
inducing  Jones  to  take  its  notes  instead  of  metal, 
the  balance-sheet  would  show  the  following 
development : — 

Due  to  Smith     .    £10,000    Cash  in  hand       .    £10,000 
Notes  outstanding    10,000    Loan  to  Jones      .       10,000 


Total    £20,000  Total    £20,000 

You  will  observe  that  since  Jones  has  taken  his 
loan  in  notes  the  cash  originally  deposited  by 
Smith  remains  in  the  bank's  hands,  and  the  loan 
to  Jones  is  represented  by  a  liability  of  the  bank 
to  meet  the  notes  which  it  has  passed  over  to  him. 
These  notes,  being  a  promise  to  pay  by  the  bank, 
are  in  effect  a  loan  by  Jones  to  it,  and  thus  Jones 
and  the  bank  have  become  mutually  indebted.  The 
bank  has  lent  £10,000  to  Jones,  and  he,  by  taking 
payment  in  the  bank's  promises  to  pay,  is  lending  it 
£10,000  as  long  as  he  refrains  from  presenting  the 
notes  and  demanding  cash  for  them.  Jones ^and 
the  bank  are  thus  mutually  indebted,  and  by  their 
agreement  to  owe  one  another  money  the  currency 
has  been  increased  by  £10,000,  and  to  that  extent 
Jones  is  enabled  to  hire  and  load  a  ship  for  fqrejgn 
trade,  or  otherwise  to  engage  in  productive 
enterprise. 

When  the  bank  finds  that  the  notes  which 
Jones  borrowed  are  not  quickly  presented,  but  are 


MUTUAL  INDEBTEDNESS  27 

accepted  by  the  commercial  community  for  the 
payments  that  he  makes  in  loading  his  ship,  and 
passed  on  from  hand  to  hand  and  remain  out- 
standing, it  proceeds  to  the  next  step  of  making 
advances  to  Brown,  Robinson  and  Williams,  and 
the  balance-sheet  will  be  amplified  as  follows  : — 

Due  to  Smith     .    ,£10,000    Cash  in  hand        .    £10,000 
Notes  outstanding     40,000    Loans  to  customers     40,000 


£50,000  £50,000 

The  great  principle  of  currency  based  on  mutual 
indebtedness  has  thus  been  extended ;  the  bank  is 
liable  for  £40,000  of  its  promises  to  pay  on  demand, 
and  its  customers  are  indebted  to  it  for  £40,000. 
And  this  £40,000  is  in  circulation,  quickening  the 
wheels  of  trade,  increasing  production  and  profit- 
able commerce.  And  the  mutual  indebtedness  of 
the  bank  and  its  customers  has  brought  this  new 
currency  into  being. 

But  it  will  be  observed  that  the  bank  now  owes 
£50,000  in  all,  and  holds  only  £10,000  in  metallic 
cash  against  all  these  liabilities  on  demand.  This 
will  probably  be  a  safe  proportion  for  it  to  work  on 
in  ordinary  circumstances,  but  if  it  continued  to 
increase  the  amount  of  its  note  issue  without  a  pro- 
portionate increase  in  the  amount  of  cash  held 
against  it,  the  day  would  come  when  some  unfore- 
seen accident  brought  in  an  unusual  number  of  notes 


28  THE  MEANING  OF  MONEY 

for  presentation,  and  its  fate  would  be  sealed.  In 
the  early  days  of  banking  this  sort  of  disaster  was 
common  enough,  and  folk  found  that  they  had  sold 
their  goods  and  services  in  return  for  notes  which 
they  had  believed  to  be  as  good  as  gold  and  dis- 
covered too  late  to  be  worth  only  the  paper  that 
they  were  printed  on.  The  manufacture  of  cur- 
rency out  of  mutual  indebtedness  had  proved  too 
easy  and  simple  a  process,  and  the  necessity  for  a 
proportionate  backing  of  gold  had  been  ignored. 

Disasters  of  this  kind  not  only  reduced  the 
number  of  note-issuing  banks  in  England,  but 
produced  a  body  of  opinion  which  aimed  at  making 
the  bank-note  a  mere  bullion  certificate,  only  to  be 
issued  against  a  backing  of  gold  to  its  full  value. 
In  London,  the  Bank  of  England  had,  since  its  very 
early  days,  possessed  the  monopoly  of  note  issue 
as  far  as  joint-stock  companies  were  concerned,  and 
the  private  banks  had  already  ceased  to  issue  notes 
when  the  question  of  the  regulation  of  the  note 
issue  was  taken  in  hand  in  1844. 

The  body  of  opinion  above  referred  to  then  pre- 
vailed, and  it  was  decided  by  the  Bank  Act  of  1844 
that  in  future  any  expansion  in  the  Bank  of 
England's  note  circulation  must  only  be  based  on 
metal.  Up  to  ^"14,000,000  it  might  issue,  notes 
against  securities,  and  it  was  arranged  thatif-any 
country  note  issues  lapsed,  two-thirds  of  them 
might  be  added  to  the  amount  of  notes  that  the 


REGULATION   OF  NOTE  ISSUE          29 

Bank  of  England  might  so  issue,  and  this  arrange- 
ment has  since  then  raised  the  amount  of  bank-notes 
based  on  securities  to  nearly  i8J  millions.  By  the 
terms  of  the  Act,  the  metal  held  against  any  notes 
that  might  be  issued  above  this  line  might  be  four- 
fifths  gold  and  one-fifth  silver;  but  the  Bank  has 
long  ceased  to  hold  silver  against  its  notes,  and  any 
increase  in  their  amount  can  now  only  be  based  on 
an  increase  in  its  gold  store. 

Such  are  the  conditions  under  which  Bank  of 
England  notes  are  now  issued,  and  since  country 
issues  are  in  these  days  a  small  item  in  the  volume 
of  currency  in  England,  the  only  notes  that  need 
here  be  considered  are  those  of  the  Bank  of  Eng- 
land, which  are,  like  sovereigns,  legal  tender  to 
any  amount.  The  value  of  a  bank-note  arises  from 
the  belief  that  it  can  be  converted  into  gold  and  will 
be  accepted  as  payment  for  goods.  It  therefore 
follows  that  since  the  Bank  of  England  note  is  legal 
tender  in  England,  it  will  be  accepted  in  payment 
for  goods  as  long  as  the  British  Government  is 
strong  enough  to  enforce  the  law  of  the  land ;  and  it 
is  obvious  that  it  can  be  converted  into  gold  as  long 
as  the  Bank  of  England  is  solvent,  that  is  to  say, 
keeps  sufficient  gold  in  its  vaults  to  meet  its  notes 
on  presentation;  and  it  is  compelled  to  keep 
the  gold  equivalent  of  every  note  that  it  issues 
above  the  £18,450,000,  which  it  is  allowed  to  issue 
against  Government  securities.  The  strength  of  the 


30  THE  MEANING  OF  MONEY 

Bank  of  England  note  thus  depends  on  the  power 
of  the  British  Government  to  enforce  the  law,  and  on 
the  solvency  of  the  Bank  of  England.  It  is  thus  as 
strong  as  any  mere  promise  to  pay  can  be  made,  and 
is,  for  practical  currency  purposes,  as  good  as  gold. 
The  consideration  of  the  bank-note  has  thus 
already  taken  us  over  the  wavy  and  very  ill-defined 
line  which  separates  cash  from  credit.  For  a  bank- 
note is  both.  It  is  cash  in  that  it  is  immediately 
convertible  into  gold,  and  it  is  credit  in  that  it  is  a 
promise  to  pay,  and  is  only  acceptable  in  payment 
for  goods  because  it  is  believed  to  be  as  good  as 
gold.  Its  use,  in  economizing  gold  and  multiplying 
the  effectiveness  of  the  gold  retained  in  the  hands  of 
the  banker,  has  already  been  demonstrated,  and  it 
has  also  been  recorded  that  the  disasters  which 
followed  from  its  abuse,  in  days  when  bankers  had 
not  grasped  the  necessity  for  keeping  an  adequate 
proportion  of  gold  to  meet  notes  presented,  and  for 
keeping  the  rest  of  their  assets  liquid  and  realizable, 
led  to  a  reaction.  This  reaction  prompted  the 
passing  of  measures  in  England  which  prohibited 
this  economy  of  gold  by  means  of  the  bank- 
note, and  laid  down  that  any  increase  in  the  Bank 
of  England's  issue  was  to  be  based  on  an  equal 
amount  of  gold  in  its  vaults,  each  ^"5-note  being 
actually  represented  by  £5  in  gold. 

If  the  apparent  intentions  of  the  Act  of  1844 
had  been  carried  out,  the  subsequent  enormous 


THE  BANK  ACT  31 

development  of  English  trade,  if  it  had  been  possible 
at  all,  must  have  been  accompanied  by  the  heaping 
up  of  a  vast  mass  of  gold  in  the  Bank's  vaults. 
But  its  intentions  were  evaded  by  the  commercial 
community,  which  had  already  appreciated  the 
advantages  of  a  currency  based  on  mutual  indebted- 
ness between  itself  and  the  banks.  The  commercial 
community  ceased  to  circulate  bank-notes  under 
the  new  restrictions,  developing  the  use  for  daily 
cash  transactions  of  a  credit  instrument  which  had 
already  acquired  some  popularity,  namely,  a  draft 
or  bill  on  its  bankers  payable  on  demand,  and  now 
commonly  called  a  cheque.  The  drawing  of  cheques 
was  not  in  any  way  limited  by  the  Act  of  1844,  and 
the  cheque  was  in  many  ways  a  more  convenient 
form  of  currency  than  the  bank-note.  For  the 
strength  of  the  Bank  of  England  note  was  in  itself  an 
inconvenience  in  one  respect;  since  the  nature  of  the 
note  is  such  that  any  one  who  holds  it  can  present 
it  and  be  paid  in  gold  for  it  at  sight,  a  roll  of  them 
in  one's  pocket  is  as  valuable  a  burden  as  so  many 
sovereigns  or  gold  bars,  with  the  additional  merit 
of  being  more  easily  carried  by  the  owner,  and  the 
serious  disadvantage  of  being  more  easily  carried 
off  by  any  one  else.  This  danger  is  avoided  or 
enormously  reduced  when  the  community  adopts 
the  habit,  not  of  carrying  or  sending  bank-notes,  but 
of  drawing  a  cheque  on  its  bank  for  every  trans- 
action that  it  wishes  to  complete  by  payment. 


32  THE  MEANING  OF  MONEY 

The  use  of  the  cheque,  however,  involves  the 
element  of  belief  to  a  much  greater  extent  than 
that  of  the  bank-note.  We  have  seen  that  the 
latter  is  certain  of  being  taken  in  payment  for 
goods  or  converted  into  gold  as  long  as  the  British 
Government  stands  and  the  Bank  of  England  is 
solvent,  but  the  exchangeability  of  the  former 
depends  on  the  solvency  of  the  drawer  of  the 
cheque — probably  a  private  individual — and  of  the 
bank  on  which  it  is  drawn.  A  shopkeeper  who 
takes  a  cheque  in  payment  for  a  pair  of  boots  is 
liable  on  presenting  it  through  his  banker  to  have 
it  returned  marked  with  ominous  signs,  which  are 
interpreted  to  mean  that  the  customer's  alleged 
bank  refuses  to  meet  it,  because  his  account  is 
overdrawn,  or  perhaps  because  he  never  had  an 
account  with  it  at  all.  Or  it  is  barely  possible  that 
he  may  be  informed  that  the  bank  on  which  the 
cheque  was  drawn  has  put  up  its  shutters,  though 
this  possibility  is  happily  one  that  need  not  be 
practically  considered  in  these  days,  owing  to  the 
stability  which  centuries  of  experience  and  the 
light  of  publicity  have  given  to  British  banking. 

But  these  two  risks,  one  a  practical  one  and  the 
other  theoretically  in  being,  make  the  extensive 
use  of  cheques  possible  only  in  a  community  which 
has  reached  a  high  stage  of  economic  civilization 
and  is  also  blessed  with  a  high  level  of  general 
honesty  among  its  members.  And  these  features 


THE  CHEQUE  33 

in  the  character  of  a  cheque  also  made  it  obviously 
impossible  that  it  could  be  given  the  privilege  of 
legal  tender,  that  is,  that  any  one  could  be  bound 
by  law  to  accept  a  cheque  in  payment  for  goods 
delivered  or  services  rendered.  Np  one  could  be 
compelled  to  take  a  piece  of  paper  signed  by  an 
unknown  person  and  purporting  to  be  an  order  on 
a  bank  of  which  perhaps  he  had  never  heard.  So 
that  the  cheque  has  had  to  fight  its  way  to  its 
present  supremacy  without  this  advantage,  and  to 
drive  gold  and  notes  out  of  circulation,  except  in 
small  and  special  transactions,  in  spite  of  the  fact 
that  they  were  legal  tender  and  it  was  not.  This 
it  was  enabled  to  do  by  its  safety  and  convenience, 
and  the  power  of  the  drawer,  by  varying  the  form 
in  which  he  makes  it  out,  to  hedge  it  about  with 
safeguarding  restrictions,  or  to  leave  it  convertible 
into  cash  by  any  one  who  presents  it.  A  cheque 
is  merely  an  order  on  a  bank  from  one  of  its  cus- 
tomers to  pay  some  of  the  money  which  it  holds 
on  his  account  to  a  third  party,  or  to  himself  if  he 
wants  to  take  out  cash.  It  can  be  manufactured 
with  a  piece  of  notepaper  and  a  penny  stamp,  but 
it  is  much  more  usual  to  use  one  of  the  well-known 
regular  forms  supplied  by  banks  to  their  customers. 
The  convenience  of  the  cheque  follows  from  its 
safety ;  if  bank-notes  are  being  sent,  it  is  necessary 
to  note  all  the  numbers  and  register  the  packet ;  a 
cheque,  protected  by  being  crossed  and  marked 

D 


34  THE  MEANING  OF  MONEY 

"  not  negotiable,"  goes  safely  in  an  ordinary  enve- 
lope. The  words  "not  negotiable"  do  not  make  a 
cheque  not  negotiable,  but  their  effect  is,  that  no 
holder  of  a  cheque  so  marked  can  pass  on  a  better 
title  to  it  than  he  has  himself;  consequently,  if  it 
is  stolen,  any  one  who  takes  it  from  the  thief  cannot 
claim  on  it.  Further,  the  fact  that  it  can  be  drawn 
to  the  exact  amount  required  is  a  great  advantage, 
and  its  return  to  the  drawer  through  his  bank,  when 
it  fias  done  its  work  and  been  cancelled,  is  an  addi- 
tional convenience,  and  makes  the  cheque  a  record 
and  receipt,  as  well  as  a  form  of  payment. 

But  in  considering  the  qualities  of  the  cheque 
it  must  never  be  forgotten  that  it  also,  like  the 
Bank  of  England  note,  is  a  certificate  immediately 
convertible  into  legal  tender  cash,  gold  or  notes. 
It  need  hardly  be  said  that  the  great  majority  of 
cheques  are  never  presented  to  be  turned  into  cash ; 
they  are  paid  into  banks  by  those  who  receive  them, 
and  crossed  off  against  one  another  in  the  Clearing- 
house, where  representatives  of  all  the  banks  meet 
and  exchange  claims  against  one  another;  and 
cheques  thus  for  the  most  part  merely  act  as  in- 
dicators in  the  transactions  which  result  in  the 
daily  transfer  of  an  enormous  amount  of  credit  from 
one  hand  to  another,  the  whole  affair  being  finally 
reduced  to  a  matter  of  book-keeping  exchanges 
between  the  various  bankers  and  between  the 
various  accounts  in  their  books.  But  the  fact  that 


THE  CHEQUE  35 

every  cheque  gives  the  holder,  or  his  bank,  the 
right  to  demand  legal  tender,  gold  or  notes,  from 
the  bank  on  which  it  is  drawn  is  highly  important ; 
without  it,  the  cheque  could  not  have  won  its  way 
to  general  acceptability,  and  could  not  be  treated 
as  cash,  as  it  is  rather  heretically  treated  here,  on 
the  ground  that  it  is,  in  the  vast  majority  of  cases, 
readily  accepted  in  exchange  for  goods  or  services 
in  ordinary  transactions.  And  the  immediate  con- 
vertibility into  gold  or  notes,  which  is  behind  every 
cheque,  means  that  an  adequate  supply  of  gold  or 
notes  to  meet  them  on  presentation  is  as  necessary 
to  bankers  who  supply  their  customers  with  cheque- 
books as  to  those  who  formerly  made  advances  to 
them  in  the  shape  of  notes,  or  promises  to  pay.  In 
these  days  when  a  banker  lends  money,  he  lends 
the  right  to  draw  a  cheque  and  promises  to  meet 
it  on  demand,  so  that  the  principle  of  mutual  in- 
debtedness as  part  of  the  basis  of  modern  com- 
mercial currency  is  again  evident.  And  since  the 
right  to  draw  a  cheque  implies  the  right  to  call  for 
gold  or  notes,  the  extent  to  which  credit  can  be, 
created  by  bankers  will  depend,  among  other  things, 
on  the  amount  of  gold  or  notes  that  bankers  hold 
against  possible  demands.  A  banker  who  has, 
£10,000  in  gold  or  notes  at  his  command  would 
be  running  too  great  a  banking  risk  if  he  advanced 
ten  millions  to  the  most  unexceptionable  customers 
against  the  most  unexceptionable  securities;  for 


36  THE  MEANING  OF  MONEY 

by  doing  so  he  would  give  them  the  right  to  take 
out  ten  millions  in  gold  and  notes,  and  if  even  a 
thousandth  part  of  the  right  were  exercised,  the 
banker's  gold  and  notes  would  all  be  gone.  And 
since,  as  we  have  seen,  notes  are  mere  bullion 
certificates,  themselves  immediately  convertible  into 
gold,  we  come  back  to  gold  as  an  element  of  first 
importance  in  the  creation  of  banking  credit.  Qr 
we  can  express  the  matter  more  simply  by  saying 
that  the  amount  of  gold  held  by  the  banking  com- 
munity as  a  whole  will  be  a  leading  influence  among 
those  which  determine  the  amount  of  the  cheques 
that  it  can  allow  the  commercial  and  financial  com- 
munity, as  a  whole,  to  draw.  All  this  is  perhaps 
a  little  premature  in  a  chapter  which  purports  to 
be  dealing  with  cash  transactions.  But  the  cheque, 
like  the  bank-note,  is  at  once  cash  and  credit,  and 
it  cannot  be  too  early  stated  and  understood  that 
every  credit  operation  implies  a  possible  cash 
transaction,  and  that  prudent  banking  consists  in 
making  due  allowance  for  cash  demands  involved 
by  the  creation  of  credit. 


CHAPTER   IV 

THE  BILL  OF  EXCHANGE 

HAVING  reviewed  the  various  forms  of  cash,  or 
money  here  and  now,  for  which  goods  and  services 
are  habitually  exchanged,  and  for  which  the  money 
market  exchanges  money  some  day  or  money 
somewhere  else,  we  proceed  to  the  bill  of  exchange, 
a  versatile  credit  instrument  which  is  often  all 
these  three  forms  of  money  in  the  course  of  its 
career.  The  complicated  relations  between  the 
different  kinds  of  money,  and  their  habit  of  melting 
into  another,  are  well  exemplified  when  it  is  stated 
that  the  cheque,  with  which  we  are  supposed  to 
have  already  dealt,  is  actually  nothing  else  but  a 
bill  of  exchange,  with  which  we  now  propose  to 
deal. 

But  there  is  this  difference,  /^cheque  is  a  bill 
of  exchange  payable  on  demand.  A  jrill  of  exchange. 
as  we  shall  see,  is  an  order  from  A  to  B  tQjay 
a  sum  either  to  himself,  A,  or  to  a  third  party.  C. 
WherTTt  is  pavafrjp  tnrthwjt[i  it.  is  a  cheque  and 
bears  a  penny  stamp ;  when  it  is  payable  at  a  future 
date  it  is  a  bill  of  exchange  and  bears  a. stamp 
a(f 'valorem,  varying  with  the  amount  of  the  sum 


38  THE  MEANING  OF  MONEY 

named.  It  is  characteristic  of  monetary  nomencla- 
ture, which  seems  to  try  to  confuse  matters  by  apply- 
ing illogical  and  confusing  names,  that  the  title  "  bill 
of  exchange  "  should  be  given  both  to  the  genus 
and  to  one  of  the  species  into  which  it  is  divided. 
Another  distinction  exists  in  the  eye  of  the  law, 
ftpm  the  iacf  that  a  cheque,  according  to  its  legal 
definition,  must  be  drawn  on  a  bank,  whereas  a  biTT 
may  be  drawn  on  a  bank  but  is  more  often  drawn 
on  a  merchant  or  accepting  house,  or  any  debtor 
who  gives  his_creditor  the  right  to  draw  on  him. 
The  practice  of  the  market-place,  however,  does 
not  always  follow  the  legal  definition  of  the  cheque, 
but  applies  the  word  to  any  bill  payable  on  demand. 
The  element  of  time  is  thus  the  real  outstanding 
quality  in  the  bill  of  exchange,  which  separates  it 
from  the  cheque  and  justifies  my  reservation  of  it 
to  a  separate  chapter  apart  from  the  forms  of  paper 
cash. 

Logically,  the  reasons  which  included  cheques 
under  the  category  of  cash  would  perhaps  include 
the  bill  of  exchange.  Goods  and  services  are  con- 
stantly given  in  exchange  for  bills,  and  a  good  bill, 
drawn  on  an  English  bank  or  firm,  is  convertible 
into  gold.  RutJ^haF  to  gn  through  t-WO  important 
prprpssps  hefpi-ft  it  C.an  hft  SO  ennvfirtpri.  It  has  to 

be  accepted,  and  it  has  either  to  be  discounted  or 
to  await  maturity.  ~ 

i  he  bill  01  exchange  is  of  immemorial  antiquity. 
"  It  is  probable,"  says  a  great  authority  on  its  legal 


THE  EARLY  BILL  39 

aspects,  "  that  a  bill  of  exchange  was  in  its  original 
nothing  more  than  a  letter  of  credit  from  a  mer- 
chant in  one  country  to  his  debtor,  a  merchant  in 
another,  requiring  him  to  pay  the  debt  to  a  third 
person,  who  carried  the  letter,  and  happened  to 
be  travelling  to  the  place  where  the  debtor  resided. 
.  .  .  It  was  found  that  the  original  bearer 
often  with  advantage  transfer  it  to  j 
tKe  assignee  was,  perhaps,  (desirous  tn 
" 


addressed,  would  pay  it  and  sometimes  showed  it 
to  him  for  ffiat  purpose-  ftia  promise  to  p^y  w?? 

the  origin  of  acceptances."  * 

It  is  obvious  firoqi  this  theoretical  description 

of  the  early  bill  that  it,  like  its  modern  descendant, 
was  not  immediately  payable,  since,  otherwise,  its 
bearer  would  most  obviously  and  simply  have 
tested  the  willingness  to  pay  of  the  merchant  on 
whom  it  was  drawn,  by  presenting  it  for  payment. 
Acceptance  is  nothing  else  than  the  promise  of  the 
party  on  whom  the  bill  is  drawn  that  he  will  pay 
it  at  due  date  ;  and  this  acceptance  he  signifies  by 
writing  his  name  across  the  face  of  it.  A  cheque, 
in  its  legal  sense,  drawn  on  a  bank,  does  not  require 
acceptance,  because  its  payment  constitutes  and 
includes  its  acceptance  ;  but  a  cheque,  in  the  sense 
of  a  bill  payable  on  demand,  drawn  on  a  firm  which 
is  not  a  bank,  is  often  accepted. 

It  is  rather  astonishing  to  find  the  authority 
*  Byles  on  Bills  of  Exchange. 


40  THE  MEANING  OF  MONEY" 

just  referred  to  stating  that  there  is  no  evidence 
that  bills  of  exchange  were  in  use  among  the 
ancients,  though  he  refers  to  a  passage  in  Cicero's 
letters  which  appears,  to  a  lay  mind,  to  establish 
the  fact  beyond  doubt.  Writing  to  Atticus,* 
Cicero  asks  him  to  consider  whether  the  monetary 
requirements  of  his  son  at  Athens  can  be  provided 
by  exchange  operations,  and  it  is  interesting  to 
see  that  the  Latin  phrase  is  a  literal  counterpart 
of  the  English— permutari.  But  although  this  pas- 
sage is  not  sufficient  evidence,  from  a  legal  point 
of  view,  that  such  a  thing  as  a  bill  of  exchange 
was  used,  it  clearly  proves  the  existence  of  some 
form  of  exchange  machinery  in  Rome  and  Athens  ; 
and  it  is  safe  to  assume  that  the  acute  and  quick- 
minded  Greeks  exchanged  credits  against  the  goods 
that  they  bought  and  sold  between  their  busy  cities. 

The  precise  age  of  the  bill  of  exchange,  however, 
is  a  question  of  merely  antiquarian  interest.  We 
are  now  concerned  with  its  meaning  and  the  func- 
tion that  it  performs  in  the  monetary  machine.  It 

legally  defined  as  "an  unconditional  order  in 
^writing  addressed  by  one  person  to  another,  signed 

the  person  giving  it,  requiring  the  person  to 

om  it  is  addressed  to  pay  on  demand,  or  at  a 
ixed  or  determinable  future  time,  a  certain  sum 
fin  money  to,  or  to  the  order  of,  a  specified  person, 
>r  to  bearer." 

Thus  says  the  law.  But,  as  we  have  already 
*  Cic.  ad  Att.t  12,  24. 


TIME  AND   SPACE  41 

seen,  a  bill  of  exchange  becomes  a  cheque,  in 
practice  and  in  the  eye  of  the  lax-gatherer,  when  it 
is  payable  on  demand  ;  and  in  the  eye  of  the  law 
likewise  when  it  is  payable  on  demand  and  drawn 
on  a  bank.  So  that  the  distinctive  part  of  its 
actual  definition  consists  in  its  being  payable  at 
a  future  date.  Further,  though  it  may  be  an  order 
drawn  by  one  party  on  another  in  the  same  street, 
nevertheless,  since  trade  consists  largely  in  the 
exchange  of  goods  between  persons  separated  by 
distance,  it  is  usual  to  find  that  bills  of  exchange 
are  drawn  by  the  merchants  or  financiers  of  one 
centre  on  those  of  another.  In  other 
isji  cqpjstant  element  i^  flf 


of  exchange,  and.  space  is.  a,  very  usual  one.  \Vhen 
Sancho  Panza  had  his  ass  stolen  by  a  ruffian 
whom  his  master's  chivalry  had  set  free  from  the 
grip  of  the  law,  Don  Quixote  consoled  him  with  a 
promise  of  a  bill  of  exchange  (ctdula  di  cambio)  for 
three  asses  out  of  five  in  his  stable.  As  they  were 
then  wandering  in  the  Sierra  Morena,  the  elements 
of  time  and  space  were  both  present.  The  bill 
was  duly  drawn  on  Don  Quixote's  niece,  and  ran 
as  follows  :  — 

"  Dear  niece,—  At  sight  of  this,  my  first  bill  of 
ass-colts,  give  order  that  three  out  of  the  five  I 
left  at  home  in  your  custody  be  delivered  to 
Sancho  Panza,  my  squire;  which  three  colts  I 
order  to  be  delivered  and  paid  for  the  like  number 
received  of  him  here  in  tale  ;  and  this,  with  his 


42  THE  MEANING  OF  MONEY 

acquittance,  shall  be  your  discharge.  Done  in  the 
heart  of  the  Sierra  Morena,  the  twenty-second  of 
August,  this  present  year " 

"It  is  mighty  well,"  said  Sancho,  "now  you 
have  only  to  sign  it." 

"It  wants  no  signing,"  said  Don  Quixote;  "I 
need  only  put  my  cipher  to  it,  which  is  the  same 
thing,  and  is  sufficient,  not  only  for  three,  but  for 
three  hundred  asses." 

The  draft  was  thus  in  many  respects  irregular ; 
apart  from  the  fact,  with  which  the  priest  consoled 
Sancho  when  he  found  that  he  had  lost  it,  that 
"one  written  in  a  pocket-book  would  not  be 
accepted."  Nevertheless,  this  bill  drawn  in  jest 
by  Cervantes  on  posterity  more  than  three  cen- 
turies ago,  is  a  very  fair  parody  of  its  modern 
counterpart.  Its  verbiage,  of  course,  has  been  left 
out,  the  bill  of  to-day  being  generally  drawn  with 
business-like  brevity ;  but  it  is  a  definite  order  to 
Don  Quixote's  niece,  signed  by  his  cipher,  to 
pay  a  stated  number  of  ass-colts,  to  Sancho, 
against  value  received  from  him  at  the  place 
where  the  bill  is  drawn.  The  fact  that  this  value 
received  is  wholly  fictitious  is  not  quite  without 
parallel  in  modern  practice.  Modern  practice,  in 
its  insatiable  search  for  means  of  credit  manu- 
facture, has  often  found  it  convenient  to  create 
bills  of  exchange  out  of  nothing,  drawing  them 
against  aspirations  or  expectations  or  speculations. 
And  cases  have  been  known  in  which  an  attempt 


THE  ORIGINAL   ESSENCE  43 

was  made  to  give  the  "kites,"  or  accommodation 
paper,  so  produced,  an  air  of  demure  respecta- 
bility by  some  reference  to  goods  passing,  as 
imaginary  as  the  three  asses  which  Don  Quixote 
states  that  he  has  received  from  Sancho. 

The  original  essence  of  a  bill  of  exchange  was 
that  it  was  a  claim  for  the  payment  of  a  debt, 
based  on  the  moving  of  saleable  produce  to  the 
place  at  which  it  is  expected  to  find  a  market. 
The  custom  which  made  it  payable  at  a  date  subse- 
quent to  its  arrival,  and  the  arrival  of  the  goods, 
was  presumably  arranged  in  order  to  give  the  mer- 
chant who  received  them,  and  owed  the  money  for 
them,  time  to  dispose  of  them  and  garner  the  pro- 
ceeds. But  his  acceptance  of  the  bill,  or  acknow- 
ledgment that  he  has  to  pay  the  money  at  its  date 
makes  it  immediately  negotiable,  or 
convertible  into  cash,  by  the  process  of  discount, 
which  will  be  explained  later. 

Let  US  lake  a-  concrete  example,  and  simplify  it 
by  the  elimination  of  many  of  the  processes 
through  which  a  modern  bill  actually  passes. 

Silas  P.  Watt,  farmer,  of  Dakota,  sells  his 
wheat-crop  for  £2000  to  John  Smith,  of  London, 
corn-dealer;  John  Smith  sees  no  reason  why  he 
should  pay  for  the  wheat  before  it  has  been  shipped, 
knowing  that  a  month  or  two  must  pass  before  it 
has  reached  him,  and  been  marketed  and  turned  into 
money  in  his  pocket.  Silas  P.  Watt,  on  the  other 
hand,  sees  no  reason  why,  during  all  this  interval, 


44  THE  MEANING  OF  MONEY 

he  should  have  parted  with  his  wheat  and  should 
have  nothing  to  show  for  it ;  and  his  banker  or 
trust-manager,  who  has  probably  made  an  advance 
against  it,  is  even  more  strongly  convinced  of  the 
impropriety  of  such  a  proceeding.  Consequently, 
thanks  to  the  compromise  which  commerce  has 
devised  to  meet  this  difficulty,  Watt  in  Dakota 
draws  a  bill  on  Smith  in  London  for  £2000  payable 
at  sixty  days'  sight — that  is,  sixty  days,  phis  three 
"  days  of  grace,"  after  the  bill  has  been  accepted — 
and  is  able  to  give  this  bill  to  his  bank  or  trust 
company  to  be  realized  in  payment  for  the  loan  on 
his  crop.  The  bank  endorses  the  bill  by  signing 
its  name  on  the  back  of  it,  and  sends  it  to  its  agent 
in  London,  together  with  documents  showing  that 
the  wheat  has  been  actually  shipped  and  insured 
against  risks  on  the  way,  and  on  its  arrival  it  is 
accepted  by  Smith,  who  writes  his  signature  across 
the  front  of  it  to  show  that  he  acknowledges  the 
indebtedness  at  the  due  date,  and  is  given  posses- 
sion of  the  documents.  It  is  thereupon,  supposing 
Smith's  name  to  be  good  and  in  sound  credit,  a 
negotiable  instrument  which  can  be  discounted,  that 
is,  turned  into  as  much  ready  cash  as  a  promise  to 
pay  at  a  distant  date  is  worth  according  to  the  cur- 
rent rate  of  interest.  For  example,  if  the  £2000  bill 
has  still  a  month  to  run  and  the  current  rate  of 
interest  is  6  per  cent,  per  annum,  its  present  value 
will  be  decided  by  simple  arithmetic  to  be  £1990. 
This  is  a  very  simple  example  of  the  manner  in 


A  SIMPLIFIED  EXAMPLE  45 

which  the  bill  of  exchange  facilitates  trade  by 
creating  a  piece  of  negotiable  paper  against  a 
genuine  trade  transaction.  Wheat  was  not  wanted 
in  Dakota,  and  is  always  wanted  in  London,  and 
therefore  its  transfer  from  Dakota  to  London  gives 
it  value  by  putting  it  into  the  place  in  which  it 
will  fetch  a  price.  The  interval  is  bridged  by 
the  bill,  which  finances  the  transaction  from  its 
beginning  to  its  end.  When  the  bill  falls  due,  if, 
as  we  may  suppose  for  the  sake  of  clearness,  it  has 
not  been  discounted,  Watt  or  his  bank  (to  whom 
we  suppose  him  to  have  passed  it  on)  applies 
through  his  London  agent  for  the  money,  and 
Smith,  having  in  the  meantime  disposed  of  the 
wheat,  has  the  necessary  funds  ready  at  his  bank 
to  meet  his  acceptance ;  the  agent  places  the  pro- 
ceeds to  the  credit  of  the  bank  in  London,  to  be 
used  as  it  may  direct.  In  actual  practice,  how- 
ever, the  bank's  agent  would  probably  have  dis- 
counted the  bill  and  so  turned  it  into  immediate 
cash  on  its  arrival,  and  the  bank  in  Dakota  would 
already  have  sold  drafts  on  London  against  it,  to 
customers  in  America  who  had  payments  to  make 
in  England. 

A  bill,  such  as  this  one  that  we  have  imagined, 
drawn  against  the  actual  shipment  of  actual  pro- 
duce, and  especially  of  produce  of  universal  demand 
and  immediate  consumption,  such  as  wheat, 
obviously  possesses  the  great  advantage  of  "pay- 
ing itself,"  according  to  the  common  phrase  in 


46  THE  MEANING  OF  MONEY 

Lombard  Street.  The  wheat  comes  to  market  and 
is  sold,  and  cancels  the  debt  created  against  it. 

It  thus  begins  to  appear  that  the  bill  of  exchange 
is  not  only  a  beautifully  simple  and  efficacious 
device  for  financing  commerce,  but  is  also  an  ideal 
form  of  investment  for  bankers  and  others  who 
are  obliged  by  the  nature  of  their  business  to 
keep  their  resources  liquid,  that  is,  readily  con- 
vertible into  cash. 

For  a  genuine  bill  of  the  kind  described  pays 
itself  automatically,  as  we  have  seen,  at  maturity, 
owing  to  the  necessities  of  the  community,  which 
must  have  wheat  or  perish,  and  a  banker  who  invests 
his  funds  by  discounting  good  bills  has  only  to 
let  some  of  his  bills  mature  without  replacing  them, 
in  order  to  replenish  his  store  of  cash.  Bills  drawn 
against  wool,  cotton,  hides,  and  other  raw  materials 
of  the  principal  industries  which  are  turned  into 
articles  of  universal  consumption  are,  for  practical 
purposes,  equally  good;  for  the  goods  behind 
the  bill,  being  certain  of  a  market,  and  likely,  if 
anything,  to  rise  in  value  in  time  of  war  or  political 
scare,  secure  the  acceptor  against  the  chance  of 
being  "locked  up,"  as  it  is  called,  with  an  asset 
which  he  cannot  realize. 

It  is  this  quality,  inherent  in  a  genuine  bill, 
which  gave  rise  to  the  saying  that  banking  is  the 
easiest  possible  business  to  conduct,  when  once 
the  banker  has  grasped  the  difference  between  a 
bill  of  exchange  and  a  mortgage.  We  have  seen 


BEAUTIES  OF  THE  BILL  47 

that  the  genuine  bill  of  exchange  is  easily  negoti- 
able before  maturity,  and  on  maturity  is  cash  by 
the  sale  of  the  goods  on  which  it  is  based.  A 
mortgage  or  loan  against  real  property,  hougggr 
and  land,  is  by  no  means  readily  negotiable,  since 
the  two  expensive  processes  of  survey  and  exam i- 
nation  of  title  are  involved  before  it  can  be  trans- 
ferred, and  the  security  behind  it  is  the  most 
difficult  of  all  to  turn  into  cash,  especially  at  times 
of  political  or  other  disturbance.  "You  may  buy 
land  now  as  cheap  as  stinking  mackerel,"  says 
Falstaff,  when  he  brings  news  of  Hotspur's 
rebellion. 

But,  as  a  matter  of  practical  fact,  a  very  large 
number  of  the  bills  drawn  are  not  of  this  genuine 
character,  and  the  use  of  this  admirable  and  efficient 
instrument  of  credit  has  been  so  extended,  that 
the  distinction  between  it  and  a  mortgage  on  real 
property  is  nowadays  sometimes  in  favour  of  the 
latter,  which  has  at  any  rate  something  behind  it. 

We  have  seen  that  the  original  justification  of  a 
bill  of  exchange  arose  from  its  being  drawn  against 
produce  in  the  course  of  being  marketed,  or  being 
worked  up  into  a  state  in  which  it  would  be  more 
valuable,  and  that  the  bill  bridged  the  intermediate 
period  by  providing  the  buyer  and  seller  with  an 
instrument  that  could  be  immediately  realized.  A 
very  short  step  in  advance  of  this  arrangement  led 
the  dealers  in  exchange  to  create  bills  at  a  time  of 
year  when  no  crops  were  ready  to  be  drawn  against, 


48  THE  MEANING  OF   MONEY 

in  order  to  make  profits  out  of  the  provision  of  a 
form  of  remittance  at  these  periods,  and  to  cover 
themselves  later  on  when  the  genuine  produce  bills 
began  to  come  forward.  Let  us  once  more  take  a 
concrete  case.  In  July,  Silas  Watt  may  want  to 
make  a  payment  in  London  for  farming  machinery  ; 
he  has  no  crop  to  draw  against  as  yet,  but  his 
bank  will  sell  him  a  draft  on  London,  having  made 
arrangements  with  Smith,  who  is  now  grown  from 
a  merchant  into  an  "accepting  house,"  to  accept 
bills  drawn  by  it,  for  a  consideration,  against 
securities  instead  of  produce.  When  Watt's  crop 
is  harvested,  and  a  genuine  bill  on  London  is 
created  by  its  sale,  it  will  restore  the  American 
bank's  credits  in  London,  which  were  reduced  by 
the  draft  that  it  had  provided  to  pay  for  Watt's 

machinery. 

When  John  Smith  is  described  as  having  grown 
from  a  merchant  into  an  accepting  house,  he  is 
supposed  to  have  passed  through  a  process  which 
has  been  a  fairly  common  experience.  Like  many 
other  merchant  houses,  he  has  given  up  the  actual 
handling  and  selling  of  merchandise,  though  retain- 
ing the  title  of  merchant,  which  is  highly  honoured 
in  the  City,  and  is  confining  his  attention  to  the 
profits  which  he  can  more  easily  earn,  if  his  name 
be  good  enough,  by  placing  his  acceptance  at  the 
disposal  of  borrowers  who  want  to  draw  on  him. 
The  arrangement  that  he  has  made  with  Watt's 
banker,  and  with  many  other  dealers  in  bills  of 


ANTICIPATORY  BILLS  49 

exchange  in  other  parts  of  the  world,  enables  them 
to  draw  on  one  another  at  any  time,  whether  there 
be  produce  passing  or  no,  and  brings  into  being 
the  instrument  known  as  a  finance  bill.  By  this 
operation  he  and  they  create  credit  instruments 
which  can  be  discounted  and  turned  into  cash,  on 
the  security  of  their  names  which  are  on  the  bills. 

This  system  of  creating  bills  of  exchange,  as 
long  as  they  are  created  in  anticipation  of  crop 
movements  and  other  genuine  processes  by  which 
products  are  given  value  by  treatment  and  move- 
ment into  the  place  where  they  are  wanted,  is  quite 
legitimate,  and  tends,  as  will  be  explained  in  a  later 
chapter,  to  steady  the  fluctuations  in  exchange,  and 
to  check  unnecessary  shipments  of  gold  backwards 
and  forwards  across  the  hemispheres. 

But  having  discovered  that  profitable  business 
was  to  be  done  by  creating  bills  in  anticipation  of 
movements  of  produce  or  manufactures,  the  enter- 
prising spirits  of  the  financial  community  were 
naturally  impelled  to  go  further,  and  create  bills  for 
the  mere  purpose  of  discounting  them  and  so  pro- 
viding themselves  with  cash.  As  there  was  no 
moving  produce  in  question,  they  were  created 
against  property  that  would  be  difficult  of  realiza- 
tion, such  as  landed  estate,  or  against  securities 
which  might  or  might  not  be  easy  to  sell,  or  merely 
against  the  credit  of  the  creators,  and  all  the 
varieties  of  bills  so  produced  differ  more  or  less 
essentially  from  the  ideal  form  of  bill  of  exchange, 

£ 


50  THE  MEANING  OF  MONEY 

which,  as  we  saw,  paid  itself  on  maturity  by  being 
drawn  against  actual  movements  of  produce  of 
general  and  rapid  consumption.  And  there  is  often 
great  difficulty  in  detecting  from  the  appearance  of 
a  bill  whether  there  be  real  produce  behind  it,  or 
some  other  form  of  security,  or  nothing  but  the  credit 
of  the  parties.  Some  bills  carry  on  their  faces  a 
history  of  the  whole  transaction  involved.  The 
subjoined  specimen,  faithfully  copied,  with  names 
altered,  shows  that  Messrs.  Laing,  Mackay  &  Co., 
of  Madras,  the  drawers  of  the  bill,  order  John 
Smith  &  Co.,  a  London  accepting  house,  to  pay  to 
the  Credit  Bank  of  India  £169  45.  6d.,  against  hemp 
shipped  to  Bremen  in  the  steamship  Napoleon. 
Laing,  Mackay  &*Co.  have  probably  sold  the  bill 
to  the  Credit  Bank,  and  so  provided  themselves 
with  funds  for  paying  for  the  hemp.  The  bill  is 
payable  "three  months  after  sight";  as  it  is  drawn 
in  Madras  on  June  n,  we  may  suppose  that  it 
arrives  in  London  on  July  i.  It  is  probably  sent 
to  the  London  office  of  the  Credit  Bank  of  India, 
by  which  it  is  immediately  presented  to  John 
Smith  &  Co.  for  acceptance.  They  accept  it  by 
marking  across  it  with  a  stamp — 

ACCEPTED  JULY  i,  1908. 
PAYABLE  AT  THE  CAPITAL  &  COUNTIES  BANK,  LTI>, 

and  adding  the  signature  "John  Smith  &  Co."  The 
bill  is  thus  payable  three  months  after  July  i,  with 
the  customary  three  days  of  grace  added,  that  is, 


•00  *  AVHOVW  'ONIVT 


52  THE  MEANING  OF  MONEY 

on  October  4.  The  bill  is  probably  then  dis- 
counted, that  is,  sold  for  cash,  and  on,  or  the  day 
before,  its  due  date  the  holder,  whoever  he  may  be, 
will  pay  it  in,  like  a  cheque,  to  his  account  at  his 
own  bank,  which  will  collect  the  amount  from  the 
Capital  &  Counties  through  the  Clearing  House, 
and  the  Capital  &  Counties  will  debit  John  Smith 
&  Co.  The  phrase  which  describes  the  bill  as  "  this 
first  of  exchange  "  and  orders  its  payment  "  second 
and  third  of  same  tenor  and  date  not  paid,"  shows 
that  this  is  the  original  bill,  and  so  the  first  of 
exchange.  The  "  second  and  third  "  are  the  dupli- 
cate and  triplicate  of  it;  the  second  of  exchange 
is  sent  by  another  boat,  as  a  precaution  against 
delay,  if  the  first  should  happen  to  go  to  the 
bottom  of  the  sea,  or  be  lost  in  the  post.  The 
third  is  generally  retained  by  the  drawer. 
More  often  the  bill  takes  a  form  like  this : — 


£2000.  NEW  YORK,  Sept.  yd,  1908. 

At  ninety  days  after  sight  of  this  FIRST  of  Exchange 
(SECOND  Unpaid)  pay  to  the  order  of  Messrs.  Jones. 

Two  THOUSAND  POUNDS  STERLING, 
Value  received,  and  charge  the  same  to  a/c  as  advised. 
To  John  Smith  &  Co.\ 

London.    /  EVANS  &  PUGH. 


Experts  in  credit  may  be  able  to  hazard  a 
shrewd  guess  from  the  appearance  of  a  bill,  as  to 
what  is  behind  it.  But  the  phrase  "Value  re- 
ceived" covers  a  multitude  of  mystery,  and  the 
difference  between  a  genuine  produce  bill  and  a 


HOUSE  BILLS  53 

piece  of  finance  paper  is  often  difficult  to  detect. 
Finance  bills  being  based  on  securities  which  are 
less  readily  realizable,  especially  in  times  of 
apprehension  and  uncertainty,  than  genuine  pro- 
duce of  general  demand,  are  obviously  more  likely 
to  land  their  acceptors  in  difficulty  if  they  have 
been  accepting  too  many  of  them.  And  it  is  thus 
easy  to  understand  why,  when  there  is  any  strain  on 
credit,  Lombard  Street  sometimes  begins  to  talk 
seTTbusly  about  the  number  of  finance  bills  that 
are  passing. 

Another  class  of  bill  that  becomes  unpopular 
when  the  market  for  credit  is  in  a  nervous  state  is 
tfre~"jhouse  bill"  thatis,-the  bill  drawn  by  a  firm  or 
company  on  itself.  If,  for  example,  John  Smith 
establishes  his  brother  Robert  in  Oporto  to  finance 
the  port  wine  trade,  and  the  Oporto  Smith  draws 
bills  extensively  on  Smith  in  London,  being  merely 
an  oversea  branch  of  the  same  firm,  the  bills  so  drawn 
will  not  be  as  good  as  if  they  were  drawn  by  one 
firm  on  another  which  is  wholly  distinct,  and  so 
carried  behind  them  the  credit  and  resources  of  two 
establishments.  If  this  paper  became  too  common, 
the  watch-dogs  of  the  credit  organization  would 
remark  that  there  was  too  much  Smith  on  Smith 
about,  and  would  describe  it,  in  its  picturesque 
phrase,  as  mere  "  pig  on  pork." 

The  classical  example  of  pig  on  pork  is  the 
order  on  Mrs.  Micawber  which  Mr.  Micawber  gave 
to  David  Copperfield  in  the  King's  Bench  prison. 


54  THE  MEANING  OF  MONEY 

"  Mr.  Micawber,"  so  David  tells  the  tale,  "  was  wait- 
ing for  me  within  the  gate,  and  went  up  to  his  room 
(top  story  but  one)  and  cried  very  much.  He 
solemnly  conjured  me,  I  remember,  to  take  warning 
by  his  fate ;  and  to  observe  that  if  a  man  had  twenty 
pounds  a  year  for  his  income,  and  spent  nineteen 
pounds  nineteen  shillings  and  sixpence,  he  would  be 
happy,  but  that  if  he  spent  twenty  pounds  one  he 
would  be  miserable.  After  which  he  borrowed  a 
shilling  of  me  for  porter,  gave  me  a  written  order 
on  Mrs.  Micawber  for  the  amount,  and  put  away 
his  pocket  handkerchief  and  cheered  up." 

David  would  have  found  some  difficulty  in 
inducing  anybody  to  discount  that  bill,  though  doubt- 
less Mrs.  Micawber  would  have  accepted  it  with  a 
fine  flourish,  and  with  perfect  confidence  that  "some- 
thing would  turn  up"  before  it  was  presented. 
Nevertheless  its  complete  worthlessness  has  been 
paralleled  before  now  in  the  world  of  commercial 
fact,  when  foreign  firms  have  established  branches, 
consisting  of  a  clerk  and  an  office  boy,  in  England, 
and  drawn  bills  on  them,  which  have  been  accepted, 

course,  by  the  clerk,  who  had  authority  to  sign 
for  the  firm  by  procuration,  and  have  then  actually 
been  discounted  and  turned  into  cash. 

Mr.  Micawber  has  thus  taken  us  a  step  further 
than  Don  Quixote.  The  Don  drew  a  bill  on  his 
niece,  whom  he  knew  to  be  able  and  ready  to  meet 
it,  in  favour  of  Sancho,  against  a  fictitious  delivery 
by  Sancho  to  him  of  three  ass-colts.  Micawber,  in 


A  MERIT  AND  A  DANGER  55 

a  debtors'  prison,  drew  in  favour  of  David  on  his 
wife,  who  was  then  in  process  of  being  sold  up. 
He  doubtless  believed,  nay  was  certain,  that  his 
paper  was  as  good  as  gold.  So  do  many  others 
who  draw  on  a  branch  establishment  which  pos- 
sesses nothing  but  an  office  table;  and  this 
Micawberish  optimism  is  at  the  back  of  a  good  deal 
of  the  exuberant  energy  which  makes  trade  hum  in 
times  of  activity.  Ano^conseqiaently  when  trade 
slackens,  and  folk  begin  to  consider  sceptically 
concerning  the  basis  of  the  credit  that  has  been 
built  up  during  the  humming  period,  there  are 
sometimes  some  awkward  moments  of  surprise  and 
disillusionment. 

The  importance  of  the  bill  of  exchange  thus  lies 
in  a  merit  and  a  danger  attached  to  it.  Tfre  merit  is 
the  fact  that  in  its  genuine  form  it  facilitates  trade 
by  creating  credits  and  so  supplying  cash  against 
real  produce  not  yet  marketed,  and  is  also  an  ideal 
form  of  investment  for  those  whose  investments 
must  be  liquid,  or  certain  of  easy  realization.  The 
danger  is  the  ease  with  which  it  can  be  created 
against  securities  which  may  not  be  readily  market- 
able, or  by  being  drawn  on  firms  by  themselves,  or 
by  correspondents,  in  order  to  provide  cash  for 
speculative  enterprise. 


CHAPTER  V 

THE   MANUFACTURE   OF  MONEY 

HAVING  reviewed  the  various  forms  of  cash,  or 
money  here  and  now,  and  the  bill  of  exchange, 
which,  from  its  ready  negotiability  and  from  its 
becoming  cash  on  maturity,  may  be  described  as 
very  nearly  cash,  we  may  pause  and  look  back 
over  the  ground  already  traversed. 

We  saw  that  gold,  with  auxiliary  tokens  of  silver 
and  bronze,  is  still  the  cash  of  the  pocket  for  retail 
transactions,  but  that  its  use  in  big  commercial  and 
financial  transactions  was  economized  first  by  the 
use  of  bank-notes,  and  then,  when  the  law  laid 
restrictions  on  the  use  of  bank-notes  which  pre- 
vented any  increase  in  their  issue  except  against 
an  equal  amount  of  gold,  by  the  use  of  cheques. 
But  we  found  that  the  general  acceptability  of 
notes  and  cheques  arose  from  their  being  con- 
vertible into  gold,  which  is  the  only  form  of  pay- 
ment that  is  universally  and  always  acceptable 
in  the  economically  civilized  world. 

The  restrictions  on  the  bank-note  have  practically 
eliminated  note  issues  in  England  except  that  of  the 


THE  RIGHT  TO   DRAW  A   CHEQUE     57 

Bank  of  England  note,  which  being  legal  tender  and 
backed  by  the  gold  in  the  bank's  vaults  is  regarded 
as  a  bullion  certificate  just  as  good  as  gold,  and  has 
become  itself  part  of  the  basis  of  credit.  That  is  to 
say,  a  banker  who  has  Bank  of  England  notes  in 
his  till  is  in  a  position  to  make  advances  to  his 
customers  on  the  strength  of  them,  exactly  as  if 
they  were  sovereigns.  The  money  of  modern 
English  commerce  and  finance  is  the  cheque,  and 
the  credit  dealt  in  in  the  London  money  market  is 
the  right  to  draw  a  cheque.  We  have  next  to  find 
out  how  this  right  to  draw  a  cheque  is  created, 
and  we  shall  find  that  it  is  generally  created  by  an 
advance  made  by  a  banker. 

Since  the  cheque  is  an  order  to  pay  gold  or 
notes,  it  is  sometimes  assumed  that  all  these  orders 
which  are  turned  over  by  the  London  bankers' 
Clearing-house,  to  the  extent  of  some  thirty  millions 
a  day,  are  orders  drawn  by  folk  who  have  acquired 
the  right  to  do  so  by  depositing  gold  and  notes 
with  the  banks.  And  it  is  a  rorrupon  poplar 
mistake,  when  one  is  told  that  the  banks  of  the 
United  Kingdom  hold  over  900  millions  of  deposits, 
to  open  one's  eyes  in  astonishment  at  the  thought 
of  this  huge  amount  of  cash  that  has  been  saved 
by  the  community  as  a  whole,  and  stored  by 
them  in  the  hands  of  their  bankers,  and  to  regard 
it  as  a  tremendous  evidence  of  wealth. 

But  this  is  not  quite  the  trueTview  of  the  case. 


58  THE  MEANING  OF  MONEY 

Most  of  the  money  that  is  stored  by  the  community 
in  the  banks  consists  of  book-keeping  credits  lent 
to  it  by  its  bankers.  It  is  usually  supposed  that 
bankers  take  money  from  one  set  of  customers  and 
then  lend  it  to  other  customers ;  but  in  most  cases, 
the  money  taken  by  one  bank  has  been  lent  by 
another. 

It  will  be  remembered  that  when  we  were 
tracing  the  origin  of  the  bank-note,  we  drew  up  an 
imaginary  and  simplified  balance-sheet  of  a  note- 
issuing  bank  showing — 

Due  to  depositors    ^10,000        Cash  in  hand      ..     £10,000 
Notes  outstanding      40,000        Advances  to  cus- 
tomers ..         ..        40,000 

^50,000  ;£5<¥>oo 

In  order  to  simplify  the  matter,  we  left  out  the 
bank's  capital  reserves,  investments,  and  other 
items  which  appear  in  balance-sheets,  but,  now 
that  we  have  come  to  the  point  at  which  the  manu- 
facture of  the  right  to  draw  cheques  has  to  be  made 
as  clear  as  may  be,  it  will  be  better  to  come  into 
closer  touch  with  the  facts  of  the  case  and  look  at 
a  bank  balance-sheet  of  to-day.  In  order  to  get  a 
fair  average  specimen  I  have  taken  the  latest  avail- 
able balance-sheets  of  half  a  dozen  of  the  biggest 
banks,  and  put  their  figures  together.  But  before 
we  can  consider  them  it  will  perhaps  be  safer,  in 


A  SPECIMEN  BALANCE-SHEET          59 

the  interests  of  clearness,  to  try  to  arrive  at  some 
rough  notion  of  the  meaning  of  a  balance-sheet. 

A  balance-sheet  is  a  statement  showing  on  the 
left  side  the  balances  of  the  amounts  that  have  been 
received,  or  are  owing,  by  the  company  or  firm  that 
issues  it;  and  on  the  right  side  the  amounts  that 
have  been  paid  out  by  it,  or  are  owing  to  it,  or  are 
held  by  it.  On  its  left  side  are  the  liabilities,  on 
the  right  the  ^setft. '  if  you  are  not  well  versed  in 
these  mysteries  you  will  probably  be  astonished  to 
see  the  banks'  capital  among  their  liabilities;  but 
reflection  will  show  that  the  capital  was  subscribed 
to  the  companies  by  their  shareholders,  to  whom 
they  have  to  account  for  it,  and  was  invested  in  the 
assets  on  the  other  side.  After  this  introduction 
to  balance-sheets  in  general,  let  us  examine  the 
aggregated  specimen  that  I  have  drawn  up. 

Millions  Millions 

°f£-  of^. 

Capital  paid  up  ..         ..       16      Cash  in  hand  and  at  the 
Reserve  Fund     ..         ..       II          Bank  of  England      ..       43 
Current  and  deposit  ac-  Loans  at  call  and  short 

counts 249          notice 27^ 

Acceptances  on  behalf  of  Bills  discounted  and  ad- 

customers         ..          ..       16}        vances  ..          ..     153 

Profit  and  Loss  account  i£    Investments      ..         ..      48 

Liability  of  customers  on 

acceptances    ..         ..       i6.J 
Premises  ..         ..        6 

294  294 

The  above  statement  does  not  include  the  figures 


60  THE  MEANING  OF  MONEY 

of  the  Bank  of  England,  but  is  an  agglomeration  of 
the  balance-sheets  of  six  of  the  biggest  of  the 
ordinary  joint-stock  banks. 

The  first  feature  that  strikes  the  casual  observer 
is  the  smallness  of  the  paid-up  capital  of  the 
banks  when  compared  with  the  vastness  of  the 
figures  that  they  handle.  We  see  that  only  16 
millions  out  of  the  294  that  they  have  to  account 
for  have  been  actually  paid  up  by  shareholders, 
though  ii  millions  have  been  retained  out  of  past 
profits  and  accumulated  in  reserve  funds,  and  i£ 
millions  are  due  to  shareholders,  for  distribution 
as  dividend  or  addition  to  reserve,  in  the  shape  of 
the  profit  and  loss  account  balance  for  the  period 
covered  by  the  balance-sheet.  A  profit  of  ij 
millions  on  16  is  handsome  enough,  especially 
when  it  is  considered  that  most  of  these  balance- 
sheets  covered  a  half-year's  work,  but  i£  millions 
out  of  294  is  a  trifle,  and  it  thus  appears  that 
a  narrow  margin  of  profit  on  their  total  turn-over 
enables  the  banks  to  pay  good  dividends,  and  that 
the  business  of  credit  manufacture  earns  its  reward, 
as  might  be  expected,  out  of  the  credit  that  it 
makes. 

Proceeding  in  our  examination,  we  see  that  the 
item  oTacceptances  on  behalf  of  customers  on  one 
side  is  balanced  by  the  liability  of  customers  on 
acceptances  on  the  other.  This  means  that  the 
banks  have  accepted  bills  for  their  customers  (so 


CURRENT  AND  DEPOSIT  ACCOUNTS     61 

making  them  first-class  paper  and  easily  negotiable), 
and  are  so  technically  liable  to  iqeet  t^em  on 
maturity;  ft"*1  ginr*»  fh*»  fngtQmpJff  fiTft  .expected  to 
nieet  them,  and  have  presumably  given  due  security, 
this  liability  of  the  customer  to  the  bank  is  an  off- 
setting asset  against  the  acceptance.  And  since  the 
acceptance  business  is  a  comparatively  small  item, 
and  a  bank's  liability  under  its  acceptances  is  not  a 
liability  in  quite  the  same  sense  as  its  deposits,  and 
does  not  immediately  affect  the  present  question  of 
the  manufacture  of  currency,  it  may  be  omitted  for 
the  present.  We  can  thus  simplify  the  balance- 
sheet  by  taking  out  this  contra  entry  on  both 
sides. 

Further  analysis  of  the  liabilities  shows  that  the 
capital,  reserves,  and  profit  and  loss  balance  may 
be  regarded  as  due  from  the  banks  to  their  share- 
holders, and  that  the  remaining  big  item,  current 
and  deposit  accounts,  is  .due  to  their  customers. 
This  is  the  item  which  is  usually  spoken  of  as  the 
deposits,  according  to  the  tiresome  habit  of  monetary 
nomenclature  which  seems  to  delight  in  applying 
the  same  name  to  a  genus  and  one  of  the  species 
into  which  it  is  divided.  Just  as  the  bill  of  ex- 
change is  divided  into  cheques  and  bills  of  ex- 
change, so  the  banks'  deposit  accounts  are  divided 
into  current  and  deposit  accounts.  But  most  people 
who  have  a  banking  account  know  the  meaning  of 
this  distinction.  Your  current  account  is  the 


62  THE  MEANING  OF  MONEY 

amount  at  t  jour  credit  which yn»  <^n  ^raw  out. 

or  against  which  you  can  draw  cheques,  at  any 
moment;  your  deposit  account  is  the  amount  that 
you  have  placed  on  deposit  with  the  bank  and  can 
only  withdraw  on  a  week's  or  longer  notice,  and  it 
earns  a  rate  of  interest,  usually  H-  per  cent,  below 
the  Bank  of  England's  official  rate.  The  essential 
point  to  be  grasped  is  the  fact  that  the  banks1 
deposits,  as  usually  spoken  of,  include  both  the 
current  and  deposit  accounts,  and  are  due  by  the 
banks  to  their  customers. 

Now  let  us  see  how  this  huge  debt  from  the 
banks  to  the  public  has  been  created.  An  examina- 
tion of  the  assets  side  of  the  balance-sheet  proves 
that  most  of  it  has  been  created  by  money  lent  to 
their  customers  by  the  banks,  and  that  the  cheque 
currency  of  to-day  is,  like  the  note  currency  of  a 
former  day,  based  on  mutual  indebtedness  between 
the  banks  and  their  customers.  For  the  assets  side 
shows  that  the  banks  hold  43  millions  in  cash  and 
at  the  Bank  of  England,  48  millions  in  investments, 
and  6  millions  invested  in  their  premises  —  the 
buildings  in  which  they  conduct  their  business — 
and  that  180^  millions  have  been  lent  by  them  to 
their  customers,  either  by  the  discounting  of  bills 
or  by  advances  to  borrowers,  or  by  loans  at 
call  or  short  notice.  This  last  item  is  generally 
described  in  bank  balance-sheets  as  "cash  at  call 
ancTshort  notice,"  but  it  has  been  lent,  in  most 


MUTUAL  INDEBTEDNESS  63 

cases,  to  bill  brokers,  whose  functions  will  be 
described  later ;  and  though  more  readily  called  in 
than  the  advances  to  ordinary  customers,  it  has 
nevertheless  been  lent,  and  so  seems  to  be  hardly 
cash  in  the  ordinary  sense  of  the  word.  We  can 
now  reconstruct  our  balance-sheet,  leaving  out  the 
acceptances  on  both  sides,  as  follows : — 

Millions  Millions 

Of£.  Of£. 

Due  to  shareholders      ..       28^    Cash  in  hand  and  at  Bank 

Due  to  customers          ..     249         of  England      ..         ..  43 

Investments        ..         ..  48 

Premises 6 

Due  from  customers      ..  iSoJ 

277*  277£ 

And  it  thus  appears  that  nearly  three-quarters  of 
the  amount  due  from  the  banks  to  their  customers 
are  due  from  their  customers  to  the  banks,  having 
been  borrowed  from  them  in  one  form  or  another. 
And  this  proportion  would  perhaps  be  exceeded  if 
we  could  take  the  figures  of  English  banking  as  a 
whole.  But  that  cannot  be  done  at  present,  because 
some  of  the  smaller  banks  do  not  separate  their 
cash  from  their  loans  at  call  in  their  published 
statements.  The  greater  part  of  the  banks'  deposits 
is  thus  seen  to  consist,"  not  of  cash  paid  in,  but  of 
credits  borrowed.  For  every  loan  makes  a  deposit, 
and  since  our  balance-sheet  shows  iSo^  millions  of 
loans,  iSoi-  out  of  the  249  millions  of  deposits  have 
been  created  by  loans. 


64  THE  MEANING  OF  MONEY 

To  show  how  a  loan  makes  a  deposit,  let  us  sup- 
pose that  you  want  to  buy  a  thousand-guinea  motor- 
car and  raise  the  wherewithal  from  your  banker, 
pledging  with  him  marketable  securities,  and  re- 
ceiving from  him  an  advance,  which  is  added  to 
your  current  account.  Being  a  prudent  person  you 
make  this  arrangement  several  days  before  you 
have  to  pay  for  the  car,  and  so  for  this  period 
the  bank's  deposits  are  swollen  by  your  £1050,  and 
on  the  other  side  of  its  balance-sheet  the  entry 
"advances  to  customers"  is  also  increased  by  this 
amount,  and  the  loan  has  clearly  created  a  deposit. 

But  you  raised  your  loan  for  a  definite  purpose, 
and  not  to  leave  with  your  bank,  and  it  might  be 
thought  that  when  you  use  it  to  pay  for  your 
car  the  deposit  would  be  cancelled.  But  not  so. 
If  the  seller  of  your  car  banks  at  your  bank,  which 
we  will  suppose  to  be  Parr's,  he  will  pay  your 
cheque  into  his  own  account,  and  Parr's  bank's 
position  with  regard  to  its  deposits  will  be  un- 
changed, still  showing  the  increase  due  to  your 
loan.  But  if,  as  is  obviously  more  probable,  he 
banks  elsewhere — perhaps  at  Lloyd's — he  will  pay 
your  cheque  into  his  account  at  Lloyd's  bank,  and 
it  will  be  the  creditor  of  Parr's  for  the  amount 
of  £1050.  In  actual  fact,  of  course,  so  small  a 
transaction  would  be  swallowed  up  in  the  vast 
mass  of  the  cross-entries  which  each  of  the  banks 
every  day  makes  against  all  the  others,  and  would 


LOANS   MAKE  DEPOSITS  65 

be  a  mere  needle  in  a  bottle  of  hay.  But  for  the 
sake  of  clearness  we  will  suppose  that  this  little 
cheque  is  the  only  transaction  between  Parr's 
and  Lloyd's  on  the  day  on  which  it  is  presented ; 
the  result  would  be  that  Parr's  would  transfer 
to  Lloyd's  £1050  of  its  balance  at  the  Bank  of 
England,  where,  as  we  shall  see  in  a  later  chapter, 
all  the  banks  keep  an  account  for  clearing  purposes. 
And  the  final  outcome  of  the  operation  would  be 
that  Parr's  would  have  £1050  more  "advances  to 
customers"  and  £1050  less  cash  at  the  Bank  of 
England  among  its  assets,  while  Lloyd's  would 
have  £1050  more  deposits  and  £1050  more  cash  at 
the  Bank  of  England.  But  the  £1050  increase  in 
Lloyd's  deposits  would  have  been  created  by  your 
loan,  and  though  it  will  be  drawn  against  by  the 
man  who  sold  you  the  car,  it  will  only  be  trans- 
ferred perhaps  in  smaller  fragments  to  the  deposits 
of  other  banks ;  and  as  long  as  your  loan  is  out- 
standing there  will  be  a  deposit  against  it  in  the 
books  of  one  bank  or  another,  unless,  as  is  most 
unlikely,  it  is  used  for  the  withdrawal  of  coin  or 
notes;  and  even  then  the  coin  and  notes  are  pro- 
bably paid  into  some  other  bank,  and  become  a 
deposit  again  ;  and  so  we  come  back  to  our  original 
conclusion  that  your  borrowing  of  £1050  has  in- 
creased the  sum  of  banking  deposits,  as  a  whole, 
by  that  amount. 

The  same  reasoning  applies  whenever  a  bank 


66  THE  MEANING  OF  MONEY 

makes  a  loan,  whatever  be  the  collateral,  or  pledge 
deposited  by  the  borrower,  whether  Stock  Ex- 
change securities,  as  in  the  case  cited,  or  bales  of 
cotton  or  tons  of  copper ;  or,  again,  whenever  it 
discounts  a  bill.  In  each  case  it  gives  the  borrower 
or  the  seller  of  the  bill  a  credit  in  its  books— in 
other  words,  a  deposit ;  and  though  this  deposit  is 
probably — almost  certainly — transferred  to  another 
bank,  the  sum  of  banking  deposits  is  thereby  in- 
creased, and  remains  so,  as  long  as  the  loans  are 
in  existence.  And  so  it  appears  that  the  loans  of 
one  bank  make  the  deposits  of  others,  and  its  de- 
posits consist  largely  of  other  banks'  loans. 

The  matter  is  thus  more  complicated  and  diffi- 
cult to  follow  under  the  system  of  banking  by 
deposits  and  cheque-drawing  than  in  the  old  days 
of  note  issue.  When  notes  were  the  currency  of 
commerce  a  bank  which  made  an  advance  or  dis- 
counted a  bill  gave  its  customer  its  own  notes  as 
the  proceeds  of  the  operation,  and  created  a  liability 
for  itself.  Now,  a  bank  makes  an  advance  or  dis- 
counts a  bill,  and  makes  a  liability  for  itself  in  the 
corresponding  credit  in  its  books  ;  but  this  liability 
is  in  most  cases  almost  immediately  acted  on  and 
drawn  against,  and  so  transferred  to  another  bank 
by  being  paid  in  as  a  deposit  in  the  shape  of  a 
cheque  on  the  lending  bank.  This  cheque  gives 
the  bank  which  receives  the  deposit  the  right  to 
so  much  of  the  lending  bank's  balance  at  the  Bank 


LOANS  MAKE  DEPOSITS  67 

of  England,  and  the  average  result  of  the  vast 
mass  of  credits  so  created  and  transferred  roughly 
balances  itself. 

In  order  to  try  to  see  the  process  at  work,  let 
us  take  out  all  the  loans,  discounts,  and  advances 
from  the  balance-sheet  on  page  59,  and  the  corre- 
sponding deposits,  and  then  build  them  up  again. 
Their  excision  would  leave  the  balance-sheet,  sim- 
plified in  other  respects,  thus — 

Millions  of  £.  Millions  of  £ 

Capital  and  reserves  ..  27  Cash  in  hand  and  at 

Profit  and  loss            ..  i£  the  Bank        ..         ..  43 

Current  and  deposit  ac-  Investments       ..         ..  48 

counts          ..         ..  68-J  Premises           ..         ..  6 

97_  97 

If,  next  day,  each  of  the  six  banks  lent  ten 
millions  which  were  drawn  against  and  paid  into 
one  or  other  of  the  six,  the  aggregate  of  cash  in 
hand  and  at  the  Bank  would  be  unaltered,  and  the 
aggregate  deposits  would  be  increased  by  sixty 
millions,  which  would  be  represented  by  loans  and 
advances  on  the  other  side,  thus — 

Millions  of  £.  Millions  of  £. 

Capital  and  reserves         27          Cash  in  hand  and  at  the 
Profit  and  loss          ..         i£  Bank    ..          ..          ..     43 

Current   and    deposit  Investments       ..          ..     48 

accounts     ..         ..     128^        Loans  and  advances    ..     60 

Premises  ..         ..       6 

157  157 


68  THE  MEANING  OF  MONEY 

And  so  the  process  could  be  continued  till  we 
arrived  at  the  actual  figures  originally  shown.  The 
supposition  that  the  operations  would  result  in 
transfers  between  the  six  banks,  and  not  to  any 
of  the  others,  makes  our  example  look  artificial, 
though  if  we  could  get  an  aggregate  balance-sheet 
for  all  the  banks,  this  supposition  would  be  fact, 
though  complicated  by  possible  withdrawals  of  gold 
and  notes,  the  amount  of  which  would,  however, 
be  a  small  fraction  of  the  total  amounts  transferred. 

But  perhaps  we  can  make  the  matter  clearer  by 
eliminating  the  question  of  other  banks,  and  their 
action  and  reaction  on  one  another's  position.  Let 
us  take  the  case  of  a  little  local  bank  with  a  com- 
plete monopoly  of  the  banking  business  of  a  country 
town,  in  which  it  lends  to  every  one  who  is  in  a 
position  to  borrow,  and  takes  the  deposits  of  every 
one  who  has  a  banking  account.  And  let  us  suppose 
that  this  community  is  completely  isolated,  as  far 
as  money  matters  are  concerned,  from  the  rest  of 
the  country.  We  may  draw  up  an  imaginary  and 
simplified  balance-sheet  for  the  bank  as  follows : — 

£  £ 

Capital    ..         ..        100,000        Cash  in  hand  ..  200,000 

Deposits..         ..     1,500,000        Investments    ..  400,000 
Discounts     and 

advances      ..  1,000,000 

1,600,000  1,600,000 

With  these  small  and  simple  figures  before  us, 


A  LITTLE  LOCAL  BANK  69 

and  the  conception  in  our  minds  of  the  small  and 
compact  community  whose  banking  business  they 
represent,  it  is  easy  to  see  the  whole  thing  at  work 
in  imagination.  The  little  town  could  not  have 
deposited  £1,500,000  without  advances  from  the 
bank  because  there  never  was  such  a  sum  in  the 
place.  It  has  presumably  deposited  £100,000,  since 
the  bank  holds  £200,000  in  cash,  of  which  £100,000 
may  be  taken  as  having  been  contributed  by  the 
subscribers  of  its  capital.  The  rest  of  the  deposits 
have  been  provided  by  the  bank  itself  which,  on 
the  strength  of  its  £200,000  of  cash,  has  discounted 
bills  for  the  local  paper-mill  and  chair  factory,  and 
made  advances  against  any  securities  or  commo- 
dities that  its  customers  had  to  borrow  on  and  it 
considered  good  collateral,  and  has  also  given 
credits  in  its  books  for  £400,000  against  securities 
bought  by  it.  The  borrowers  have  probably  been 
generally  provided  by  the  producing,  manufac- 
turing, and  trading  classes  of  the  community,  who 
have  discounted  bills  and  taken  advances  in  order 
to  finance  themselves  over  the  periods  that  neces- 
sarily elapse  between  outlay  and  realization  in 
their  various  enterprises.  This  does  not  mean  that 
their  trade  is  unsound.  They  are  earning  regular 
profits;  but  before  one  profit  is  garnered  they 
are  at  work  in  search  of  another,  and  borrowing 
the  wherewithaLto  seek  it;  and  by  meeting  their 
demands  the  bank  is  fulfilling  the  obvious  and  most 


70  THE  MEANING  OF  MONEY 

useful  business  of  a  bank  in  financing  production 
amTmdustry.  The  land-holding,  investing,  and 
professional  classes,  who  live  ultimately  on  the  pro- 
ducers and  distributors,  taking  toll  from  them  in 
the  shape  of  rent,  interest,  and  fees,  probably  do 
most  of  the  depositing,  paying  back  to  the  bank 
the  cheques  that  they  receive,  drawn  by  those  who 
acquired  the  right  to  draw  by  a  discount,  loan  or 
overdraft.  Part  of  the  loans  raised  by  the  pro- 
ducers and  distributors  will  be  drawn  out  in  coin 
for  the  payment  of  wages,  and  will  work  their  way 
round,  through  the  tills  of  the  shopkeepers,  back  to 
the  bank,  when  the  shopkeepers  pay  in ;  for  the 
retail  dealers  necessarily,  from  the  nature  of  their 
trade,  habitually  deposit  a  considerable  amount  of 
currency  with  their  bankers,  while  other  people 
generally  deposit  cheques.  And  Jthus  it  appears 
that  the  banking  credits  provided  by  the  bank  for 
one  set  of  customers,  in  the  shape  of  loans  and 
discounts,  come  Pack  to  it  from  another  in  the 
shape  of  deposits  created  by  the  loans  and 
discounts. 

In  this  case  we  see  that  a  bank  in  this  excep- 
tional and  monopolist  position  can,  on  a  small  cash 
basis,  create,  by  discounting  bills  and  making  loans, 
the  right  to  draw  cheques,  confident  in  the  expecta- 
tion that  the  cheques  drawn  by  one  customer  will 
be  paid  into  it  by  another;  or  that,  on  the  rare 
occasions  on  which  the  right  to  draw  is  used  by 


LOANS  AND  DEPOSITS  71 

withdrawals  of  actual  coin  or  notes,  the  coin  or 
notes  will  find  their  way  back  to  it,  being  deposited 
with  it  by  those  who  receive  them.  And  when 
its  loans  are  repaid,  or  bills  that  it  has  discounted 
are  met  on  maturity,  this  can  only  be  done  by 
the  customers  who  have  borrowed  from  it  or 
taken  bills  to  it  for  discount,  paying  it  with  a 
cheque  on  itself,  and  so  cancelling  a  deposit ;  or 
perhaps  by  paying  it  in  coin  or  notes,  which  they 
will  get  from  some  one  who  has  cancelled  a  deposit 
in  order  to  withdraw  them.  And  so  its  loans  and 
discounts  create  deposits  when  they  are  entered 
on,  and  cancel  deposits  when  they  mature,  though 
in  actual  practice  their  place  would  more  probably 
be  taken  by  fresh  loans  or  discounts. 

From  this  parable  of  a  little  bank  in  an  imagi- 
nary isolated  community  we  can  see  how  an  exactly 
similar  process  works  in  English  banking  as  a 
whole,  though  in  its  case  the  question  is  compli- 
cated by  transfers  from  one  bank  to  another.  The 
historical  evolution  of  the  business  tells  the  same 
tale.  Banking  in  its  note-issuing  stage  lent  currency 
to  its  customers  in  the  shape  of  its  promissory 
notes,  and  had  on  the  assets  side  its  loans,  and  in 
the  liabilities,  its  notes  outstanding.  It  manufac- 
tured notes  which  it  lent.  Now,  it  manufactures 
credits  in  its  books,  and  current  and  deposit 
accounts  have  taken  the  place  of  notes  outstanding 
on  the  debit  side  of  its  balance-sheets. 


72  THE  MEANING  OF  MONEY 

It  cannot  conduct  this  manufacture  without  the 
assistance  of  its  customers,  and  it  may  be  -con- 
tended that  these  banking  credits  are  manufactured, 
not  by  the  banks,  but  by  the  customers  who  apply 
to  them,  and  by  the  security  that  the  customers 
bring,  and  the  bankers  approve  of,  as  fit  collateral. 
It  is  certainly  true  that  the  banks  cannot  maEe 
advances  unless  somebody  asks  for  them,  and  their 
capacity  for  doing  so  thus  depends  on  the  needs  of 
the  community,  and  also  on  the  supply  of  unpledged 
property  that  the  community  has  available  as 
security.  Whether  the  manufacture  be  conducted 
by  the  banks  or  by  their  borrowing  customers  is  a 
question  of  little  moment,  as  long  as  the  fact  is 
grasped  that  the  greater  part  of  the  deposits  shown 
in  bank  balance-sheets  have  been  brought  into 
being  by  means  of  book-keeping  credits — whether 
in  the  form  of  discounts,  advances,  or  overdrafts — 
granted  by  banks  to  customers,  and  passed  on  by 
these  customers  to  others. 

The  broad  conclusion  arrived  at  is  that  banking 
deposits  come  into  being  to  a  small  extent  by  cash 
paid  into  banks  across  the  counter,  to  a  larger  but 
still  comparatively  small  extent  by  purchases  of 
securities  by  the  banks  which  create  book  credits, 
and  chiefly  by  loans  from  the  banks  which  also 
create  book  credits. 

There  is  nothing  alarming  in  this  conclusion, 
though  people  who  have  been  accustomed  to  regard 


MUTUAL  INDEBTEDNESS  73 

bank  deposits  as  so  much  cash  paid  in  are  sometimes 
startled  when  the  other  side  of  the  matter  is 
put  to  them,  and  feel  that  banking  credit  is  a 
kind  of  questionable  conspiracy  between  banks 
and  their  customers.  A  little  reflection  shows  that 
itjs  a  beautiful  piece  of  evenly  working  mechanism, 
by  which  coin  is  economized  and  a  perfect  currency 
is  provided  with  extraordinary  ease  and  cheapness. 
Nor  need  any  sense  of  disillusionment  be  felt  when 
it  is  realized  that  bank  deposits,  in  so  far  as  they 
are  borrowed,  are  evidences  of  indebtedness  quite 
as  much  as  of  wealth. 

Everybody  knows  that  in  all  long-established, 
well-ordered  and  industrious  communities  vast 
stores  of  wealth  are  accumulated ;  and  even  if  they 
could  be  heaped  up  in  banks  and  expressed  in 
figures  nothing  would  be  gained  by  the  informa- 
tion. But  the  contemplation  of  this  mass  of  in- 
debtedness, and  of  the  cheque  currency  with  which 
it  is  passed  from  hand  to  hand,  is  novel,  stimula- 
ting and  unique.  It  is  a  wondrous  example  of 
human  ingenuity  applied  to  the  cheapening  and 
furtherance  of  trade,  finance  and  speculation. 
There  is  nothing  quite  like  it  anywhere  else,  and 
its  development  has  only  been  rendered  possible 
by  the  confidence,  based  on  solid  experience,  of 
the  majority  of  Englishmen  in  one  another's  com- 
mercial probity,  and  readiness  to  carry  out  a 
contract  at  all  costs. 


74  THE  MEANING  OF  MONEY 

The  only  defect  in  the  system  is  its  perfection. 
English  banking  has  been  so  ably  and  successfully 
conducted,  and  has  moved  forward  so  steadily, 
especially  since  the  foundation  of  the  great  joint- 
stock  banks  and  the  publicity  which  their  establish- 
ment made  necessary,  that  it  sometimes  becomes 
difficult  to  realize  that  banking  is  not  merely  a 
matter  of  quickening  the  wheels  of  commerce  with 
a  plentiful  supply  of  credit  when  trade  is  prosper- 
ous, restricting  credit  when  it  outgrows  its  cash 
basis,  writing  off  a  few  bad  debts  occasionally, 
and,  year  in  and  year  out,  making  splendid  profits 
by  lending  people  the  right  to  draw  cheques,  on 
the  assumption  that  nearly  all  the  cheques  so 
drawn  will  be  cancelled  against  one  another,  and 
will  never  involve  a  demand  on  the  banks  for 
legal  tender  cash.  To  the  modern  generation  of 
bankers,  to  whom  such  a  thing  as  a  run  on  an 
English  bank  is  a  matter  of  tradition,  a  mere  echo 
of  a  bad  old  past  which  is  gone  for  ever,  banking  is 
sometimes  a  little  apt  to  present  itself  as  the  simple 
process  described  above.  But  the  thoughtful 
bankers,  that  is  the  great  majority  of  the  wary, 
cool-headed  men  who  carry  on  this  curious  and 
magical  business  of  providing  currency  and  credit 
on  a  basis  of  mutual  indebtedness  between  them- 
selves and  their  customers,  know  well  enough  that 
there  is  another  side  to  the  question.  Jusjtas  a 
man  cycling  through  a  crowded  street  depends,  for 


BANKS  AND  THEIR  PUBLIC  75 

his  life,  not  only  on  his  own  skill  but  also  on  the 
care  with  which  the  rest  of  the  traffic  is  driven,  so 
_  sy  stem,.is-  .dependent  on  the 


and  «*flffl  -frf  tfo  public  as^nnich  as  on  its 
own  soundness. 

This  dependence  of  the.  banks  on  the  sanity  and 
sense  of  the  public  arises  out  of  the  fact  that  bank 
deposits  are  payable  in  cash,  either  on  demand, 
or  in  theory  at  a  week's  notice;  and  even  the 
deposits  at  notice  are  practically  liabilities  on 
demand,  because  if  any  one  who  had  money  de- 
posited at  notice  wanted  it  suddenly,  a  banker 
would  find  it  very  difficult  to  refuse  to  let  him  draw 
it.  Hence  it  follows  that  if  the  public,  or  a  con- 
siderable portion  of  it,  became  suddenly  bereft  of 
sense  and  sanity  to  a  sufficient  extent  to  make  it 
want  to  take  its  money  out  all  at  once,  the  position 
of  the  banks  would  be  uncomfortable,  if  they  were 
not  amply  provided  with  coin  and  notes,  and  so 
able  to  quell  the  outbreak  by  meeting  its  first 
demands  with.  a  bold  front. 

It  might  appear  that  since  bank  deposits,  as  has 
been  demonstrated,  are  largely  created  by  credits 
given  by  way  of  loan  or  discount,  any  bank  which 
happened  to  be  subjected  to  the  inconvenience  of 
a  run  would  only  have  to  call  in  loans  from  its 
debtors  to  meet  the  demands  of  its  depositors. 
But  the  matter  could  not  really  be  settled  by  this 
simple  method,  in  the  first  place  because  banks 


76  THE  MEANING  OF  MONEY 

habitually  make  loans  for  fixed  periods  but  have 
tolneet  liabilities,  as  we  have  seen,  on  demand ; 
and7  in  the  second,  because  in  the  case  of  a  panic 
severe  enough  tn  cause  a  run  tm  ft  bank,  a  large 

number  of  its  debtors  would  almost  certainly  be 
obliged  to  admit  their  inability  to  repay  their 
advances.  The  bank  would  find  itself  reduced  to 
the  unpleasant  predicament  of  having  to  try  to 
realize  the  securities  or  commodities,  or  other 
collateral  pledges,  against  which  the  loans  had 
been  granted,  and  in.  the  state  of  panic  which 
our  hypothesis  postulates  would  find  it  extremely 
difficult  to  do  so,  and  would  probably  find  it  im- 
possible to  do  so  as  rapidly  as  demands  were 
pressed  upon  it. 

Moreover,  since  we  have  already  seen  that  the 
loans  of  one  bank  create  the  deposits  of  another, 
the  attempt  by  one  to  call  in  its  loans  would 
inevitably  cause  pressure  on  the  deposits  of  the 
others,  and  so  the  evil  would  swell  and  spread  in  a 
vicious  circle.  There  is,  however,  no  need  to 
dwell  on  the  possible  horrors  of  a  hypothetical 
banking  panic.  So  much  had  to  be  said  in  order 
that  the  tremendous  obligation  might  be  realized 
which  lies  behind  this  business  that  is  conducted 
so  smoothly  and  easily,  and  that  some  appreciation 
might  be  gained  of  the  responsibility  that  is  faced 
by  the  affable  and  imperturbable  gentlemen  who 
conduct  it.  And  it  was  also  necessary  to  bring 


THE  BANKING  SKELETON  77 

the  skeleton  out  of  the  banking  cupboard  in  order 
to  emphasize  the  stern  necessity  for  unceasing 
vigilance  on  the  part  of  the  banking  world  in  the 
matter  of  its  first  weapon  of  defence  against  an 
outburst  of  public  insanity  which  might  start  an 
importunate  demand  for  cash  from  its  bankers. 

For  in  this  matter  the  public  and  the  banks  act 
and  react  on  one  another,  and  the  public  is  much 
less  likely  to  be  bitten  with  a  mania  for  hoarding 
Its  money  instead  of  leaving-  ft  fa  haflfrf,  jffif  fffotra 
that  the  banks  are  strong  enough  to  meet  a  sudden 
demand  without  flinching.  And  hence  it  follows 
thatj,  by  keeping  a  strong  line  of  defence  in  the 
shape  of  legal  tender  cash,  the  banks  can  do  much 
to  prevent  the  danflfir  from  arising,  against  which 
it  is  intended  to  protect  them.  Just  as  we  saw 
thattKe  noie-is"sumg  banks  ran  serious  risks  when 
they  made  advances  in  the  form  of  their  own  notes 
without  due  regard  to  a  store  of  metallic  cash  in 
which  to  meet  their  notes  when  presented,  so  the 
modern  cheque-making  banks  have  to  keep  an 
adequate  proportion  of  legal  tender  cash  against 
the  right  to  draw  cheques  that  they  lend  to  their 
customers,  or  become  liable  to  by  other  means. 

If  it  were  not  for  the  fact  that  the  credits  which 
they  lend  represent  the  right  to  draw  cheques 
payable  on  demand,  the  extent  to  which  they 
could  lend  would  be  only  limited  by  the  demands 
of  their  customers,  and  the  amount  of  security 


78  THE  MEANING  OF  MONEY 

that  their  customers  could  provide.  But  this 
all-important  fact  makes  the  question  of  an 
adequate  cash  reserve  against  their  liabilities  an 
essential  factor  in  the  problem. 

This  reserve  of  cash  consists  of  the  gold  and 
Bank  of  England  notes  that  they  have  in  their  tills 
and  in  their  vaults,  and  their  balance  at  the  Bank  of 
England  ;  it  is  the  first  line  in  the  assets  side,  of  the 
balance-sheet,  "cash  in  hand  and  at  the  Bank  of 
England."  On  the  other  side,  among  the  liabilities, 
we  saw  the  entry  "current,  deposit  and  other 
accounts,"  and,  if  you  work  out  the  proportion  of 
cash  against  those  liabilities,  you  will  see  what  is 
the  proportion  which  the  banks,  whose  position  is 
there  displayed,  think  it  right  and  proper  to  keep. 

There  is  no  frard  and  fast  rule  on  the-fwwnt  in 
England,  and  it  would  be  absurd  if  there  were,  for 
the  circumstances  of  banking  business  differ  so 
widely,  jthaJL  what  is  a  barely  adequate  proportion 
for  one  would  be 


Good  banking  consists  in  giving  as  much  assistance 
as  possible  to  trade  in  the  matter  of  credit,  and  at 
the  same  time  restricting  credit  as  soon  as  the  pro- 
portion between  cash  and  liabilities  is  below  the 
point  at  which  prudence  and  caution  require  that 
it  should  stand.  This  is  the  happy  mean  that  the 
banker  has  to  find.  The  exact  point  at  which  the 
mean  stands  is  a  matter  which  he  is  best  able  to 
judge;  and  though  the  desire  to  earn  big  dividends 


THE  CASH   RESERVE  79 

and  the  pressure  of  competition  are  strong 
incentives  to  him  to  place  his  ideal  proportion  too 
low,  on  the  other  hand  the  fine  traditions  of  English 
banking  and  the  wholesome  dread  of  criticism,  and 
of  the  moods  of  the  multitude,  are  eloquent  argu- 
ments in  favour  of  wisdom  and  caution. 

G9?.d  JbjLnkin^jst^r^djJ££d^  ..laws,. 

but  by  good  bankers.  Just  as  the  most  carefully 
planned  constitution  will  inevitably  break  down  if 
the  men  at  the  helm  of  government  are  incompetent 
or  dishonest,  so  no  skilfully  devised  banking  system 
will  make  banking  good,  unless  the  banking  is  con- 
ducted by  straight  and  able  managers,  or  defend 
banking  from  suspicion  by  its  customers,  if  other 
wheels  in  the  financial  machine  have  been  proved 
to  be  unsound. 

In  the  United  States  the  national  banks  in  the 
chief  cities  are  compelled  by  law  to  keep  a  cash 
reserve  equal  to  twenty-five  per  cent,  of  their 
deposits,  and  are  liable  to  inspection  by  Govern- 
ment officers  whose  business  it  is  to  see  that  the 
cash  is  duly  there.  And  yet,  the  panic  of  the  autumn 
of  1907  saw  the  banks  of  the  United  States  obliged 
to  suspend  payment  because  of  mistrust  on  the 
part  of  the  American  public,  which  would  have  with- 
drawn most  of  its  cash  if  the  banks  had  not  adopted 
the  simple  expedient  of  refusing  to  pay  it.  This 
mistrust  was  no  doubt  exaggerated,  and  in  the 
case  of  most  of  the  American  banks  was  wholly 


go  THE  MEANING  OF  MONEY 

unwarranted.  But  Americans,  in  discussing  the 
matter,  generally  admit  that  it  had  a  certain  amount 
of  basis.  The  mere  fact  of  legal  regulation  of 
the  amount  of  cash  probably  makes  the  banks  in 
America  less  careful  with  regard  to  the  nature  of 
the  rest  of  their  assets.  Some  of  their  managers 
are  apt  to  think  that,  as  long  as  they  comply  with 
the  law,  they  have  done  all  that  is  necessary,  and  so 
make  inadvisable  advances  and  hold  unrealizable 
securities,  perhaps  because  they  are  told  to  do  so 
by  some  financial  group  that  controls  them. 

There  seems  to  be  little  doubt  that  the  mistrust 
of  the  American  public  was  to  some  extent  due  to  a 
suspicion  that  its  banks  had  been  too  closely  con- 
nected with  a  great  speculative  campaign  conducted 
on  the  New  York  Stock  Exchange.  But  it  also  arose, 
perhaps  chiefly,  out  of  events  over  which  the  banks 
had  no  control,  such  as  insurance  scandals  and 
revelations  concerning  the  conduct  of  the  Trusts,* 
owing  to  which  a  general  feeling  of  uneasiness 
concerning  the  whole  financial  position  had  been 
generated.  Another  cause,  not  of  the  panic  but  of  the 
helplessness  of  American  banking  in  the  face  of  it, 
appears  to  have  been  the  old-fashioned  one  of  lack 
of  cash,  since  the  law  concerning  the  cash  propor- 

•  In  America  a  Trust  means  a  combination  of  companies  or  busi- 
nesses with  the  object  of  controlling  an  industry ;  a  trust  company 
(still  in  the  American  sense)  is  to  all  intents  and  purposes  a  bank, 
without  the  right  of  note  issue  and  less  strictly  regulated  by  law. 


PUBLIC   CONFIDENCE  81 

tions  had  been  set  aside  by  the  creation  of  a  large 
number  of  State  banks  and  trust  companies  *  which 
did  banking  business,  but  were  not  amenable  to  the 
twenty-five  per  cent,  law,  and  their  weakness,  in 
the  eyes  of  indiscriminating  depositors,  infected 
the  banks  which  had  duly  complied  with  the  law, 
and  multiplied  the  demands  on  them.  This  in- 
teresting side-light  on  the  panic  has  been  clearly 
displayed  in  an  article  by  Mr.  F.  S.  Mead,  in  the 
Atlantic  Monthly  of  February,  1908. 

In JEngland,  where  the  law  impnqep  np,  fylp*  nn 
bankers  in  this  matter,  the  public  fe^ls  fl.c.mMMi-*iiafr 
itsjnoney  is  protected  by  the  integrity  and  ability 
of  those  to  whom  it  is  entrusted.  As  long  as  this 
confidence  lasts., all  is  well:.  ^J^apY  oq^yHo  trades 
on  public  confidence  has  not  only  tp  merit  it.  but^ 
also  to  provide  for  any  arridpnf  frhof  n^gfrf,  arisi*  jfr 
in  spite  of  his  meriting.it,  the  public  were  to  with- 
draw it  owing  to  -some  mistake  on  its  part.  Hence 
bankers  have  to  be  constantly  alive  to  the  necessity 
for  keeping  their  position  strong. 

This  they  do,  in  the  first  place,  by  maintaining 
a  high  proportion  of  legal  tender  cash  to  liabilities. 
And  legal  tender  cash  means  gold  or  Bank  of  Eng- 
land notes.  And  as  Bank  of  England  notes,  above  a 
certain  number,  can  only  be  issued  against  gold,  we 
come  back  once  more  to  gold  as  an  important  part 
of  the  basis  of  credit. 

*  See  note,  p.  8a 

G 


82  THE  MEANING   OF   MONEY 

Bankers'  credit,  as  we  have  seen,  consists  of 
advances  given  to  customers  against  goods  or 
securities,  and  to  that  extent  the  goods  and 
securities  may  be  said  to  be  the  basis  of  credit. 
But  since  prudent  banking  demands  that  the  extent 
of  credits  given  must  depend  on  the  amount  of  the 
banks'  legal  tender  cash,  and  that  is  gold  or  its 
equivalent,  the  amount  of  gold  that  is  available  in 
the  hands  of  the  banks,  or  of  their  bank,  the  Bank 
of  England,  is  in  some  respects  the  most  important 
influence  on  the  supply  of  credit. 

And  now  we  are  beginning  to  see  why  it  is  that 
so  much  importance  is  attached  to  the  movements 
of  gold  to  and  fro  across  the  Continents,  and  why 
an  increase  in  the  supply  of  gold  in  London  makes 
discount  rates  easy  and  sends  up  the  prices  of 
securities,  unless  balanced  by  counteracting  influ- 
ences. Gold  being  the  basis  of  credit,  it  obviously 
follows  that,  when  there  is  more  gold,  credit  will 
be  more  abundant,  and  that  therefore  bills  will  be 
discounted  more  cheaply,  that  is  tp^say^ the  promise 
of  money  some  day  will  fetch  more  money  to-day  ; 
and  that  securities  will  go  up  in  price,  because 
money  wherewith  to  buyfljejn  is  to  be  had  on  more 
reasonable  terms.  But  if  counteracting  influences, 
such  as  higher  prices  of  commodities  which  necessi- 
tate a  greater  amount  of  credit  for  financing  trade, 
are  at  work  at  the  same  moment,  these  effects  of  an 
increase  in  the  amount  of  gold  will  be  veiled.  But 


THE  MERCANTILE  SYSTEM  83 

they  will  be  at  work,  and  the  increase  of  gold  will 
be  producing  its  effect,  though  it  may  not  be  detected 
on  the  surface. 

Nevertheless,  this  dependence  of  the  money 
market,  and  of  the  City  as  a  whole,  on  the  question 
of  the  amount  of  gold  available  is  often  a  stumbling- 
block  not  only  to  the  uninstructed  public,  but  also 
to  theoretical  economists,  who  are  apt  to  see  in  it 
a  remnant  of  the  Mercantile  system.  This  system, 
with  a  view  to  keeping  treasure  in  the  country 
against  an  outbreak  of  war,  endeavoured  to  regulate 
trade  so  that  we  might  export  more  than  we  im- 
ported, creating  a  balance  of  exports,  for  which,  it 
was  hoped,  the  foreigner  would  pay  in  gold. 

There  is  this  much  of  resemblance  between  the 
two  systems,  that  both  the  Mercantilist  wanted, 
and  the  money  market  wants,  to  have  a  certain 
amount  of  gold  in  the  country.  The  Mercantilist 
wanted  it  because,  in  days  when  the  credit  system 
had  not  been  developed,  war  could  only  be  financed 
with  cash,  a  store  of  which  was  therefore  desirable ; 
and  we  saw  in  a  former  chapter  that  the  Athenians 
achieved  this  object  and  glorified  the  Acropolis  and 
their  goddess  by  overlaying  her  statue  with  gold.* 
The  only  mistake  made  by  the  Mercantilists  in  this 
connection  lay  in  the  trade  regulations  that  they 
made  with  a  view  to  securing  their  object.  The 
money  market  wants  gold  because  gold  is  the  only 
»  p.  16. 


84  THE  MEANING  OF  MONEY 

universally  acceptable  form  of  payment  in  times  of 
panic,  and  is  therefore  needed  as  the  bankers'  reserve 
against  accidents,  and  so  regulates  the  supply  of 
credit,  because  prudent  bankers  cannot  give  credit 
beyond  a  certain  proportion  to  their  holding  of 
legal  tender  cash,  gold  or  its  equivalent. 

And  indeed,  when  we  arrive  at  the  conclusion 
that  gold  is  the  basis  of  credit,  we  are  only  re- 
stating the  fact,  which  emerged  in  Chapter  III., 
that  all  forms  of  cash  are  gold  or  representatives  of 
gold,  bank-notes  being  payable  in  gold  if  the  holder 
demands  it,  and  cheques  being  payable  in  gold  or 
bank-notes.  For  since  every  credit  involves  a  right 
to  draw  gold  or  notes,  and  notes  are  based  on 
gold,  it  follows  that  credits  cannot  be  given  unless 
there  is  an  adequate  amount  of  gold  in  the  hands 
of  the  banks  which  give  them. 


CHAPTER  VI 

LONDON  THE  WORLD'S  MONETARY  CLEARING  HOUSE 

So  far  money  has  been  dealt  with  chiefly  as  a  matter 
of  internal  experience,  and  from  the  point  of  view 
of  the  relations  between  the  Englishman  and  his 
banker.  In  the  account  given  of  the  origin  and 
development  of  the  bill  of  exchange  the  horizon 
was  expanded  for  a  time,  but  otherwise  our  atten- 
tion has  been  concentrated  on  the  forms  of  cash 
with  which  we  English  buy  and  sell  commodities 
and  services,  and  the  process  by  which  these  forms 
of  cash,  and  the  right  to  draw  and  use  them,  are 
created  by  our  bankers  and  their  customers,  through 
loans  against  goods  and  securities. 

But  the  money  market  is  a  very  much  bigger  and 
more  interesting  affair  than  it  appears  to  be  from 
this  merely  insular  examination.  It  is,  in  fact,  the 
most  interesting  of  all  markets,  because  it  is  world- 
wide to  a  greater  extent  than  the  market  in  anything 
else,  with  the  possible  exception  of  wheat. 

The  use  of  money  in  cash  transactions  is 
obviously  world-wide ;  wherever  men  buy  and  sell 
they  must  use  some  medium  of  exchange  which  is 


86  THE  MEANING  OF  MONEY 

commonly  accepted  in  their  country,  even  though 
it  be  only  an  inconvertible  paper  dollar  printed  at 
the  caprice  of  a  Central  American  Republic.  But 
money  in  its  wider  sense,  in  the  sense  of  bankers' 
credits  is  also  a  matter  of  world-wide  use,  or  at  any 
rate  demand,  and  it  is  only  in  London  that  money  of 
this  kind  is  to  be  had  freely,  and  in  the  fullest  mean- 
ing of  its  real  definition,  which  implies,  as  we  have 
seen,  the  right  to  demand,  and  the  certainty  of 
receiving,  payment  in  gold. 

It  is  clear  that  in  order  to  be  of  any  use  in  inter- 
national finance,  money  must  be  immediately  and 
unquestionably  convertible  into  gold,  the  only  form 
of  payment  which  is  universally  and  always  accept- 
able in  economically  civilized  countries.  And  money 
of  this  kind  is  only  to  be  had  in  London. 

In  a  pleasant  American  comedy  produced  very 
many  years  ago,  one  of  the  characters,  holding  out 
a  bundle  of  papers  to  her  husband,  exclaims, 
"What's  this?  You  said  you'd  give  me  some 
money  !"  "That's  so,"  says  the  husband,  "and  so 
it  is.  Why,  it's  Wabash ! "  Wabash  was  the  name 
of  a  railroad  stock  of  somewhat  problematical  value, 
and  quite  useless  as  a  medium  of  exchange  for  the 
purposes  of  household  shopping.  And  any  one 
who  has  a  credit  in  any  other  centre  but  London,  is 
liable  to  find  himself,  when  he  tries  to  realize  it  and 
turn  it  into  cash,  met  by  an  offer  of  Wabash,  or 
something  equally  inconvenient  for  his  purposes. 


PARIS  AND  BERLIN  87 

The  French  are  clever  and  versatile  financiers, 
and  the  unfailing  thrift  which  distinguishes  the 
inhabitants  of  their  country  gives  it  a  great  and 
almost  unsatiable  power  of  absorbing  investments, 
so  that  Paris  is  a  very  important  factor  in  the  inter- 
national loan  market.  But  the  French  temperament 
is  essentially  cautious,  and  the  Bank  of  France  does 
not  attempt  to  do  the  business  that  we  regard 
as  banking,  which  includes  readiness  to  meet  all 
demands  in  gold.  Its  notes  are  convertible,  but 
convertible  at  its  option  into  either  gold  or  silver ; 
and  it  frequently  takes  advantage  of  this  option, 
when  it  considers  it  undesirable  to  part  with  its 
gold.  So  that  any  one  who  has  a  credit  in  Paris  has 
a  credit  which  is  of  no  international  value,  except 
in  so  far  as  he  can  make  use  of  it,  by  means  of  the 
machinery  of  exchange,  to  buy  a  credit  in  London, 
which  is  convertible  as  a  matter  of  course. 

In  theory  Berlin  has  a  gold  standard,  and  the 
notes  of  the  Imperial  Bank  are  theoretically  payable 
on  demand  in  gold.  But  Germany  is  young  as  a. 
financial  nation,  and  its  banks  have  been  so  busily 
and  deeply  engaged  in  promoting  the  industrial 
activities  of  the  country  that  their  resources  and 
energies  have  been  hitherto  absorbed  by  this  task, 
which  they  have  performed  with  great  success. 
Consequently  they  have  not  yet  addressed  them- 
selves to  this  question  of  international  banking  and 
of  being  prepared  to  meet  all  demands  on  them  in 


88  THE  MEANING  OF  MONEY 


gold;  and  any  nng  yhft  wants  to  ffrftW  f"1  the 

Imperial  Bank's  store  to  any  large  extent  is  likely 
to  find  obstacles  and  difficulties  in  his  way,  and  is 
moreover  likely  to  be  met  with  a  most  discouraging 
countenance  when  next  he  requires  accommodation. 
With  the  store  of  sagacity  and  scientific  method 
that  it  has  available,  it  is  probable  enough  that  Berlin 
may  one  day  rise  to  the  full  responsibilities  of  a 
monetary  centre,  ready  to  face  the  real  tasks  of  the 
international  banker.  At  present,  it  is  chiefly 
engaged  with  the  solution  of  internal  problems. 

In  New  York  the  right  to  gold  is  less  ostensible, 
but  in  ordinary  circumstances  more  practicable.  A 
credit  in  the  United  States  carries  with  it  the  right 
to  legal  tender  currency,  and  the  general  probability 
of  securing  what  is  called  a  gold  certificate  and 
turning  it  into  the  metal.  But  in  the  autumn  of  1907, 
the  whole  American  system  broke  down,  and  an 
interesting  form  of  emergency  currency,  created  to 
fill  the  gap  caused  by  an  outbreak  of  hoarding  on 
the  part  of  both  the  public  and  the  banks,  became 
the  only  available  medium  of  exchange.  It  took  the 
form  of  "clearing-house  certificates  "  issued  by  the 
American  banks,  but  whatever  else  they  certified, 
it  was  not  a  certainty,  or  even  a  chance,  of  obtain- 
ing gold. 

It  is  a  cherished  ambition  among  Americans  to 
see  New  York  some  day  established  as  the  monetary 
centre  of  the  universe,  and  with  their  vast  natural 


AMERICA'S  AMBITION  89 

resources  and  population  there  is  no  doubt  that 
the  United  States  can  achieve  any  material  tasks 
that  they  choose,  if  they  can  learn  the  necessary 
lessons  and  develop  the  necessary  character.  At 
present  the  characteristics  of  the  typical  American 
business  man  seem  to  fit  him  to  do  most  things 
better  than  banking.  His  haste  to  grow  rich,  his 
eager  enthusiasm  and  buoyant  optimism,  followed 
by  plunges  into  apprehension  and  depression,  his 
quickness  and  versatility,  his  keen  sensibilities,  his 
craving  for  speculative  excitement,  and  his  genius 
in  exaggeration — all  these  qualities  make  him  an 
excellent  producer,  a  first-ra.te.distributor,  ajnjracu- 
lous  advertiser,  an  unapproachable  gambler,  and  a 
somewhat  questionable  banker.  There  are  hundreds 
of  good  bankers  in  the  United  States,  who  take  a 
scientific  interest  in  the  problems  of  their  business 
such  as  is  comparatively  rare  among  their  English 
brethren.  But  they  are  developed  in  spite  of  their 
environment,  and  of  the  atmosphere  of  eager  enter- 
prise which  makes  it  difficult  to  observe  the  hum- 
drum laws  and  limitations  of  banking. 

In  1907,  the  American  banks  were  so  strongly 
suspected  by  their  own  public  of  having  made  indis- 
creet use  of  their  opportunities  and  capacities,  that 
the  public  preferred  to  take  care  of  its  own  money. 
And  American  banking  met  the  situation  by  re- 
fusing  to  meet  demands  on  it.  Banks  that  can  be 
so  suspected  by  their  own  public,  and  can  meet  the 


90  THE  MEANING  OF  MONEY 

suspicion  in  such  a  manner,  have  much  to  do  and 
undo  before  they  can  constitute  themselves  into  an 
international  banking  centre.  Thoughtful  Ameri- 
cans, from  whose  illuminating  conversation  I  have 
gleaned  these  explanations  of  the  shortcomings  of 
American  banking,  also  point  out  that  it  has  not  yet 
distinguished  between  solvency  after  an  interval, 
and  readiness  to  meet  demands  at  once  and  without 
question.  It  seems,  they  say,  to  think  that  it  has 
done  all  that  can  be  expected  if  it  holds  securities 
that  will  ultimately,  if  it  is  given  time,  be  capable 
of  realization ;  and  has  not  grasped  the  fact  .that  no 
banker  who  takes  a  serious  view  of  his  banking 
responsibilities,  could  ask  to  be  given  time  in  meet- 
ing demands  on  him.  The  internal  effects  of  the 
recent  panic  will  doubtless  soon  be  forgotten  ;  but 
it  will  be  long  before  international  finance  will  look 
with  much  confidence  on  a  draft  on  New  York, 
which  has  been  shown  by  experience  to  be  in- 
convertible in  times  of  crisis.  When  it  has  lived 
down  this  lapse,  and  provided  the  confidence  that 
is  now  lacking,  and  the  necessary  machinery  of  a 
discount  and  money  market,  American  banking 
may  set  about  making  New  York  the  monetary 
centre  of  the  world.  And  an  American  can  learn 
anything,  if  he  thinks  it  worth  while. 

Some  of  the  smaller  centres  meet  drafts  on  them  in 
gold,  but  their  limited  resources  limit  their  powers. 
Practical  financiers  of  all  nationalities  will  admit  that 


THE  DRAFT  ON  LONDON  91 

a  draft  on  another^entrejsj)jilyj^ua^lejrom  the 
international  point  of  view  from  the  readiness  with 
which  it  can  be  turned'/through  the  machinery  of 
exchange,  into  a  draft  on  London,  which  is  the  real 
cash  of  international  commerce  and  finance,  because 
money  in  the  real  sense  of  the  word,  gold  or  its 
equivalent,  is  only  to  be  had,  always  and  without 
question,  and  to  any  amount,  in  London.  But  this 
is  only  one  of  several  reasons  which  make  London 
pre-eminent  as  the  money  factory.  Its  money  is  not 
only  more  genuine,  that  is,  more  undoubtedly  con- 
vertible than  that  of  any  other  centre,  but  is  also 
under  normal  circumstances  both  more  cheaply  and 
easily  produced  to  suit  the  convenience  of  the  user. 

In  recent  years  London  has  not  been  able  to 
boast  that  its  money  is  cheaper  than  that  of  all 
other  centres ;  in  the  first  place  because  the  South 
African  war  destroyed  a  vast  mass  of  English 
capital,  and  gave  foreign  countries,  from  which  we 
bought  material  for  it,  claims  on  us  which  we  have 
since  then  been  painfully  liquidating;  and,  in  the 
second,  because  the  great  strain  on  the  money 
machine  caused  by  the  extraordinary  and  world- 
wide activity  of  trade  during  the  period  which 
culminated  in  1907,  imposed  on  London,  as  the 
world's  money  factory,  the  necessity  for  guarding 
the  basis  of  credit  by  the  maintenance  of  high  rates 
for  money. 

Perhaps  it  should  here  be  explained  that  when 


92  THE  MEANING  OF  MONEY 

a  large  and  increasing  number  of  people  require 
money,  or  the  right  to  draw  a  cheque,  for  trade  or 
other  purposes,  they  naturally  have  to  pay  more  for 
it,  that  is,  they  have  to  promise  more  money  some 
day  for  the  money  here  and  now  that  they  borrow. 
And  the  centre  which  alone  is  prepared  to  meet 
demands  on  it  in  gold  is  obliged  to  be  especially 
careful  to  make  them  pay  more,  that  is,  to  charge 
higher  rates  for  money,  so  as  to  keep  the  demands 
on  it  within  bounds,  and  also  because,  by  charging 
higher  rates,  it  attracts  gold  from  abroad  by  a 
process  which  will  be  explained  later. 

But  even  though  money  was  not  always  cheaper 
in  London  than  elsewhere,  it  was  always  more 
easily  to  be  had.  In  the  case  of  the  most  obvious 
form  of  credit-raising,  as  for  example  when  foreign 
governments  are  raising  loans  or  American  rail- 
roads are  offering  bond  issues,  there  are  times 
when  France  is  a  readier  market  for  the  borrower 
than  England,  owing  to  the  greater  thrift  of  the 
French  people,  which  gives  the  Paris  banks  a  bigger 
mass  of  accumulated  capital  to  handle ;  but  even 
then  Paris  often  hands  the  borrower  most  of  the 
money  in  the  shape  of  a  draft  on  London,  and  in 
times  of  uncertainty  or  strain  London  becomes  the 
only  place  in  which  the  loan-issuing  machinery  can 
work.  In  the  summer  of  1907  Japan  wanted  a  loan 
to  spend  on  the  South  Manchurian  railway.  It 
was  a  most  inopportune  request,  for  at  that  time 


FREEDOM   AND   ELASTICITY  93 

the  springs  of  capital  had  dried  up  under  the 
stress  of  intensified  drafts  on  them,  and  all  the 
foreign  lenders,  who  had  previously  competed  for 
the  privilege  of  supplying  Japan's  monetary 
needs,  were  deaf  to  the  appeal.  But  London, 
having  in  former  years  prospered  by  reason  of 
Japanese  loans,  found  the  money,  with  a  bad  grace, 
it  is  true,  and  amid  protests  ^In**  bofrowfay  at  a 
moment  so  ill  chosen ;  but  found  it,  at  a  time  when 
in  no  other  centre  could  such  an  operation  have 
been  contemplated. 

This  power  is  due  to  the  unparallelled  freedom 
and  elasticity  which  mark  the  English  system.  It 
has  been  shown  that  bankers'  money  iiere  merely 
means  the  right  to  draw  a  cheque,  and  is  generally 
created  by  a  banker  lending  it  to  a  customer,  who 
passes  it  on  to  a  creditor,  who  pays  it  into  another 
bank,  and  so  one  bank's  loan  becomes  another 
bank's  deposit.  This  system  could  be  continued 
indefinitely  if  bankers  were  reckless,  for  the  only 
checks  on  the  multiplication  of  bankers'  money  are 
the  supply  of  unpledged  security,  concerning  the 
fitness  of  which  as  collateral  the  banker  decides, 
and  the  relation  that  the  banker  thinks  it  right  to 
maintain  between  liabilities  and  cash  assets.  And 
when  the  supply  of  ordinary  bankers'  money  runs 
dry,  borrowers  have,  as  we  shall  see  in  a  later 
chapter,  another  source  to  tap  in  the  Bank  of 
England,  which  again  can  lend  as  freely  as  it 


94  THE  MEANING  OF  MONEY 

pleases,  for  in  its  case  its  loans  probably  become  its 
own  deposits,  and  the  only  restraint  imposed  upon 
it  also  is  discretionary  regard  for  the  proportion 
between  its  cash  and  liabilities. 

Now  this  elasticity  is  found  nowhere  else.  In 
New  York  bankers  have  to  keep  their  compulsory 
25  per  cent,  of  cash  to  liabilities,  and  the  multi- 
plication of  credits,  which  create  liabilities,  is  thus 
restricted  by  law.  And  the  legal  tender  currency 
of  the  United  States  is  peculiarly  inelastic,  though 
efforts  are  now  being  made  to  correct  this  defect. 
In  Paris  the  amount  of  the  note  circulation  of  the 
Bank  of  France  is  limited  by  law,  and  the  credit 
facilities  available  are  limited  by  French  caution 
and  fear  of  taking  risks.  In  Berlin  complete  elas- 
ticity exists  in  theory,  and  this  theoretical  elasticity 
of  the  German  system  is  sometimes  held  up  as  a 
model  for  imitation  in  England,  by  reformers  who 
fix  their  attention  on  the  regulations  in  the  two 
countries  relative  to  the  issue  of  bank-notes.  In 
this  respect  Germany  can  certainly  claim  greater 
freedom.  In  England,  as  we  have  seen,  after  a 
fixed  limit  has  been  passed,  not  a  note  can  be  issued 
unless  backed  by  gold ;  in  Germany,  also,  there  is 
a  limit  on  the  number  of  notes  that  may  be  issued 
against  securities,  but  it  may  be  passed  at  any  time 
on  payment  of  a  tax  of  5  per  cent,  interest  on  the 
further  issue,  and  consequently  when  frprrowprg 
are  prepared  to  pay  more  than  5  per  cent,  to  the 


GERMAN   ELASTICITY  95 

Reichsbank,  it  can  manufacture  notes  for  them  as 
rapidly  as  it  considers  to  be  prudent. 

The  elasticity  of  the  German  system  thus  only 
arrives  when  money  is  at  a  high  price,  and  in 
England  elasticity  is  constant  and  chronic,  since 
the  supply  of  currency  here  does  not  depend  on 
the  number  of  notes  issued,  but  on  the  power 
of  the  community  to  draw  cheques  which  is  fur- 
nished to  it  by  its  bankers  without  any  legal 
restriction,  and  subject  only  to  the  limits  imposed 
by  the  prudence  of  the  bankers,  and  the  supply  of 
unpledged  security.  The  German  system  is  very 
scientific  and  excellent  on  paper,  for  a  banking- 
machine  which  is  at  the  note-issuing  stage  of 
development.  Under  it  notes  can  always  be  had 
at  a  price,  and  the  high  price  involved  reduces 
their  volume  when  they  are  no  longer  needed. 
But  we  have  seen  that,  at  present,  the  preoccupa- 
tion of  German  banking  with  the  task  of  financing 
industrial  development  imposes  restrictions  on  its 
other  activities;  and  hitherto  the  elasticity  of 
its  currency  arrangements  has  been  hindered, 
for  international  purposes,  by  the  fact  that  the 
currency  created  is  not,  in  practice,  to  be  relied 
on  as  completely  and  unquestionably  convertible. 
The  success  with  which  Germany  has  faced  and 
dealt  with  other  problems  makes  it  highly  prob- 
able that  this  one  of  international  banking  will 
be  faced  by  it  and  dealt  with  in  due  course. 


96  THE  MEANING  OF  MONEY 

But  at  present  it  leaves  the  responsibility  to 
London. 

The  frequent  assertion  that  money  and  a  money 
market  in  the  full  sense  of  the  words  are  only  to 
be  found  in  London,  is  not  made  by  way  of 
vainglorious  boasting  of  English  supremacy  in 
this  respect — rather,  as  will  be  seen  later,  because 
the  very  fact  carries  with  it  a  danger  and  a 
responsibility  that  must  on  no  account  be  lost 
sight  of  in  any  examination  of  London's  mone- 
tary position.  I  am  not  attempting  to  deduce, 
from  the  unquestionable  fact  that  London  is  the 
only  monetary  centre  that  is  always  ready  to 
undertake  the  full  responsibilities  of  international 
banking,  that  Englishmen  are  naturally  abler  and 
more  trustworthy  bankers  and  financiers  than  any 
other  nation.  There  is  much  to  be  said  for  this 
contention,  and  both  the  virtues  and  defects  of 
the  English  character  help  it  to  produce  good 
bankers.  But  it  must  be  admitted  that  English 
bankers  have  had  the  advantage  of  longer  and 
less  interrupted  experience,  and  that  exceptional 
circumstances  have  enabled  them  to  make  full  and 
profitable  use  of  it.  At  present,  however,  we  are 
dealing  with  the  facts  of  the  present  day  and  their 
consequences  rather  than  their  causes. 

Quick-witted  foreigners  were  very  ready  to  see 
the  advantages  which  London's  credit  system  pro- 
vided for  them.  "  Lo ! "  they  said,  "  here  is  a  banker 


LONDON'S  FOREIGN   CUSTOMERS       97 

who  has  the  courage  to  be  prepared  at  all  times  to 
pay  demands  on  him  in  gold,  and  the  good  luck  or 
some  other  quality  which  enables  him  to  do  so. 
Moreover,  he  has  a  delightfully  simple  system  by 
which  any  one  who  borrows  from  him  becomes  his 
creditor.  Let  us  go  and  get  a  credit  in  London." 
So  they  brought  their  securities  and  borrowed  on 
them,  or  brought  their  bills  and  discounted  them, 
and  so  raised  credits  here,  which  they  were  enabled 
to  count  in  their  balance-sheets  as  so  much  gold 
in  hand.  And  all  this  suited  London  very  well, 
because  London,  being  a  banker  and  not  a  philan- 
thropist, always  charged  its  foreign— or  any  other 
— customers  rather  more  for  the  loans  and  dis- 
counts than  it  allowed  them  for  the  credits  so 
created,  and  also  made  various  commissions  and 
profits  out  of  the  process.  And  the  foreigners, 
having  begun  the  system  of  depending  on  London 
as  a  banking  reserve  centre,  found  it  convenient  to 
continue,  and  many  of  them  decided  that  it  was  not 
safe  to  keep  credits  here  which  were  only  produced 
by  borrowing,  and  that  they  ought  to  have  more 
real  balances  in  London  which  were  really  their 
own ;  and  so  they  sent  over  goods  or  securities  to 
be  sold  here,  and  left  the  money  in  London  as  a 
gold  reserve.  And  this  again  suited  London's  con- 
venience very  well,  for  it  took  the  goods  and 
securities  in  exchange  for  its  promise  to  pay,  and 
now  has  the  use  cf  its  customers'  money  to  lend  to 

H 


98  THE  MEANING  OF  MONEY 

other  people.  Which  it  does  with  easy  freedom 
and  profit  to  itself,  and  is  enabled  to  continue  to 
earn  and  expand  this  very  comfortable  income  by 
merely  being  prepared  to  meet  demands  in  gold, 
when  called  upon.  This  may  seem  to  be  rather 
an  easy  mode  of  earning  a  living,  but  the  respon- 
sibility is,  in  fact,  so  great  that  no  other  centre 
tries  to  do  business  on  the  same  lines. 

But  lest  it  should  be  thought  that  this  account 
of  the  relations  between  London  and  her  foreign 
customers  is  a  creation  of  a  bombastic  fancy  of 
a  patriotically  biassed  Briton,  let  me  quote  an 
American  opinion. 

In  1901  a  meeting  of  the  American  Bankers' 
Association  was  held  at  Milwaukee,  and  a  paper 
was  read  by  Mr.  A.  B.  Stickney  on  the  "  Medium 
of  Exchange  and  the  Banking  Function."  In  the 
course  of  this  discourse  he  made  the  following 
remarks : — 

"  England  has  so  organized  her  capital  by  means 
of  her  magnificent  banking  system  that  she  is  the 
banker  of  the  world,  and  collects  tribute  from  all 
the  nations  of  the  world  in  the  form  of  interest, 
not  for  the  use  of  her  wealth  or  capital,  but 
for  the  use  of  her  credit.  Paradoxical  as  it  may 
sound,  it  is  literally  true  that  by  means  of  her 
splendid  banking  organization  England  collects 
interest  upon  millions  and  millions  of  her  own  in- 
debtedness to  other  nations.  It  is  a  very  profitable 


AN  AMERICAN   OPINION  99 

business  to  collect  interest  on  what  one  owes,  and 
it  is  this  which  makes  England  the  creditor  nation." 

The  same  interesting  paper,  which  is  printed 
together  with  many  other  thoughtful  and  illumi- 
nating utterances  by  practical  American  financiers, 
in  a  book  called  "  Practical  Problems  in  Banking  and 
Currency,"  throws  some  light  on  the  vexed  question 
of  the  divergent  interests  of  English  trade  and 
English  finance,  which  make  some  English  traders 
hostile  to  the  international  banking  business  done 
by  their  bankers.  Mr.  Stickney  tells  them  that 
"the  wares  of  commerce  follow  the  drafts  of  com- 
merce/' in  other  words  that  the  unrivalled  inter- 
national trade  done  by  this  little  island  is  partly 
due  to  its  unrivalled  banking  system.  "  I  venture 
to  suggest,"  he  says  to  his  American  audience, 
"that  you  may  subsidize  ships  to  sail  the  seas,  and 
your  armies  and  navies  may  carry  the  flag  to  all 
the  islands  of  the  seas,  but  you  will  never  control 
the  commerce  of  the  world,  nor  the  wealth  of  the 
world,  nor  the  world  itself,  until  you  have  a  bank- 
ing system  which  can  manage  the  exchanges  of  the 
world  during  commercial  crises,  and  maintain  at  all 
times  a  fairly  uniform  rate  of  interest." 

As  to  the  maintenance  of  a  fairly  uniform  rate 
of  interest,  London  cannot  compete  with  Paris. 
Paris,  thanks  to  the  protection  given  to  the  Bank 
of  France  by  its  right  to  meet  demands  in  silver  if 
it  choose  to  do  so,  maintains  a  level  of  uniformity  to 


ioo  THE  MEANING  OF  MONEY 

which   English  traders,  harassed  by  the  greater 

fluctuations  of  Threadneedle  Street,  sometimes  point 
wjth  envy.  But  it  is  fair  to  remind  English  manu- 
facturers that  the  big  profits  earned  by  London's 
international  banking  are  a  strong  argument  in 
favour  of  its  advantage  to  the  community  as  a  whole, 
and  that,  even  from  their  own  point  of  view,  it  may 
be  questioned  whetherthe  serene  tranquillity  of  rates 
in  France  would  not  be  readily  exchanged  by  their 
French  brethren  and  competitors  for  the  ease  and 
elasticity  of  credit  operations  as  conducted  here. 

The  business  of  managing  the  exchanges  of  the 
world  during  commercial  crises  is  obviously  thrown 
upon  London,  as  things  are  at  present,  by  its 
position  as  the  only  monetary  centre  which  is 
prepared  to  produce  gold  on  demand.  In  the 
autumn  of  1907,  when  sudden  crisis  compelled  the 
United  States  to  liquidate  their  financial  position, 
they  ceased  to  a  great  extent  from  buying  other 
people's  goods,  and  began  to  sell  everything  in  the 
shape  of  securities  and  commodities  that  they  could 
dispose  of,  and,  being  a  very  rich  and  resourceful 
nation,  held  the  civilized  world  in  fee  for  the  time 
being,  demanding  payment  in  gold. 

Nearjh£_all  the  gold  shipped  to  New  York  at 
that  time,  estimated  to  have  amounted  to  some 
twenty-five  millions  sterling,  came  from  London. 

But  London,  or  the  Bank  of  England,  which,  as 
usual  at  times  of  crisis,  took  a  firm  hold  of  London's 


THE  CRISIS   OF  1907  101 

operations,  decided  very  early  in  the  proceedings 
that  it  was  not  prepared  to  finance  America's 
demands  out  of  its  own  bullion-vaults.  And  so 
it  raised  its  rate  for  money,  and  thus,  by  setting 
in  motion  a  process,  the  working  of  which  will  be 
explained  in  a  later  chapter,  pulledin  gold  from 
Other  centres  to  such  afl  fltgflt  ti131^  some  four- 
fifths  of  ffr*  a«aft»™«»  «*»i'pporl  to  the  United  States 
were  supplied  by  foreign  contributions. 

It  was,  to  all  appearance,  a  very  remarkable 
demonstration  of  London's  complete  control  over 
the  world's  exchanges,  and  an  interesting  feature 
of  the  operation  was  the  fact  that  Parjs  and  Berlin, 
though  obliged  from  motives  of  self-protection  to 
let  some  of  their  gold  go  to  assuage  the  American 
rraving  fin-  fc  did  no$  send  it  direct  to_New  Y^rfc 
but  to  London.  Because  they  knew  that  gold  that 
went  to  London  could  be  got  back  again  after  a 
reasonable  interval,  but  the  state  of  affairs  then 
prevalent  in  America  made  them  very  uncertain 
concerning  the  time  that  might  elapse  before  the 
monetary  arrangements  of  the  United  States  could 
return  to  normal  conditions. 

It  was  thus  shown,  by  the  events  of  this  memor- 
able crisis,  that  London's  tremendous  responsibility 
of  providing  gold  when  it  is  required  anywhere  by 
a  pressing  emergency,  is  one  that  can  be  bravely 
and  cheerfully  borne  as  long  as  England  is  in 
a  position,  by  applying  sufficient  twists  of  the 


102  THE  MEANING  OF  MONEY 

monetary  screw,  to  force  other  nations  to  contribute 
their  share  to  the  common  necessity.  And  at  first 
sight  it  would  appear  that  London's  power  to  do  so 
was  demonstrated  in  a  very  unmistakable  manner. 
Regarded  superficially,  the  events  of  1907  seemed 

Cto  show  that  the  Bank  of  England's  rate  has  only 
.to  go  up  to  a  certain  point,  and  the  Bank  Court 
need  only  to  show  a  sufficiently  stiffnecked  deter- 
mination to  put  it  still  higher  if  necessary,  for  gold 
xto  pour  in  from  other  centres. 

Nevertheless,  it  must  not  be  forgotten  that  the 
great  producing  power  of  the  United  States  was  a 
potent  assistance  to  London  in  this  particular  case. 
We  have  seen  that  the  Americans  left  off  buying 
other  people's  goods  and  sold  everything  they  could 
sell,  so  making  the  rest  of  the  world  their  debtor  for 
the  time  being.  And  it  is  an  open  question  as  to 
how  much  of  the  gold  that  was  drawn  into  London, 
and  so  on  to  New  York,  came  because  it  was  owed 
to  New  York,  and  how  much  was  drained  out  of 
other  centres  by  London's  masterful  policy. 

In  most  economic  questions,  these  insoluble 
problems  lie  under  the  surface,  and  it  is  because 
it  is  so  easy  to  miss  them,  and  to  ignore,  or  be 
ignorant  of,  their  presence,  that  many  people  find 
it  easy  to  be  quaintly  dogmatic  about  economic 
matters,  which,  in  fact,  become  more  and  more 
complicated  and  obscure,  the  more  thoroughly  they 
are  understood. 


ENGLAND'S  LIABILITY  103 

But  whatever  doubt  there  may  be  as  to  the  causes 
of  the  ease  and  success  with  which  London  carried 
through  its  task  of  managing  the  world's  exchanges 
during  the  latest  crisis,  there  is  no  doubt  whatever 
that  the  task  lay  upon  London,  owing  to  its  position 
as  custodian  of  the  only  gold  reserve  which  is 
available  at  all  times  to  all  comers. 

And  hence  emerges  the  consideration  that 
English  banking,  which  we  have  already  seen  to 
depend  on  the  sense  and  sanity  of  the  public  at 
home,  is  also  liable  to  pressure  and  disturbance 
if  the  public  anywhere  in  the  world,  in  any  centre 
in  which  economic  development  has  made  con- 
siderable progress,  takes  it  into  its  head  to  mis- 
trust the  custodians  of  its  money. 

And  this  consideration  opens  up  a  wide  field. 
Sense  and  sanity  in  money  matters  may  be  expected 
with  a  fair  approach  to  confidence  in  the  British 
public,  and  also  in  the  public  elsewhere.  But  else- 
where, in  countries  where  banking  is  less  soundly 
conducted,  the  public  may  at  times,  without  any 
loss  of  its  sense  or  sanity,  find  genuine  cause  to 
mistrust  its  bankers.  The  mistrust  of  its  bankers 
shown  by  the  American  public  in  1907  was  pro- 
bably misplaced,  as  far  as  most  of  the  banks  were 
concerned;  but  it  arose  largely  from  suspicion  of 
the  trust  companies,  whicn  conducted  banking 
business  on  questionable  lines,  and  were  suspected 
not  without  reason.  Between  the  well-conducted 


104  THE  MEANING  OF  MONEY 

banks  and  the  ill-conducted  trust  companies, -the 
American  public,  recognizing  no  distinction,  could 
not  be  expected  to  discriminate.  The  strength  of 
a  chain  is  that  of  the  weakest  link,  and  the  reputa- 
tion of  the  banks  of  any  country  in  the  eyes  of 
the  uninformed  public  is,  in  times  of  difficulty  and 
mistrust,  that  of  the  least  ably  managed. 

This  complication,  to  which  the  leading  and  most 
prudent  English  bankers  are  very  keenly  alive, 
accounts  for  the  energy  with  which  they  try  to 
impress  on  their  more  backward  brethren  the  duty 
of  maintaining  a  high  ideal  of  strength  and  caution. 
The  latter  are  rather  apt  to  resent  what  they  regard 
as  unwarranted  and  officious  good  advice  from  folk 
who,  in  their  view,  would  do  better  to  mind  their 
own  business.  But  banking  in  all  countries  hangs 
together  so  closely,  that  the  strength  of  the  best 
may  easily  be  menaced  if  scandal  arises  owing  to 
the  mistakes  of  the  worst. 

But  at  present  we  are  concerned  with  the 
foreigner;  since  it  has  been  shown  that  banking 
trouble  in  other  countries  is  almost  bound  to 
throw  strain  on  London,  and  that  in  other  countries 
banking  trouble  may  sometimes  arise  from  bad 
banking,  we  begin  to  see  how  many  possibilities 
have  to  be  guarded  against  by  the  London  money 
market,  and  with  how  many  thousand  eyes  and  ears 
and  with  how  acute  telepathic  perception  it  has  to 
watch  the  signs  of  financial  weather.  We  saw,  in 


THE  RISK  OF  PERFECTION          105 

examining  the  relations  of  the  banks  with  their  home 
customers,  that  the  perfection  of  the  system  and 
the  absolute  smoothness  of  its  working,  sometimes 
produce  its  one  defect,  in  the  shape  of  an  inability 
on  the  part  of  some  few  unimaginative  bankers  to 
see  reason  for  counsels  of  austere  prudence.  And 
in  the  relations  of  the  English  money  market  with 
its  foreign  customers  we  find  the  same  thing.  The 
system  is  so  perfect  and  elastic  and  easy,  and 
works  so  freely  and  prettily,  that  at  times  it  runs 

thp'ri^fr  rtf  Wflf  jpnff  j"}^  fr  little  top  well. 

When  Falstaff  was  ordered  on  active  service 
again,  immediately  after  his  Shrewsbury  exploits, 
he  complained  that  "  it  was  always  yet  the  trick  of 
our  English  nation,  if  they  have  a  good  thing,  to 
make  it  too  common."  Our  English  nation  has  a 
good  thing  in  a  credit  system  of  marvellous  elas- 
ticity Clever  foreigners  appreciate  the  beauties 
of  it  very  fully  and  are  always  ready  to  make  eager 
use  of  it,  raising  credits  here  bv  means  of  finance 
paper  or  other  devices,  and  sometimes  it  happens 
that  we  "make  it  too  common."  At  the  time  of 
the  latest  crisis,  the  London  market  was  very 
well  prepared  for  possible  trouble,  because  it 
had  recently  suffered  from  a  fit  of  virtuous  self- 
examination  on  the  subject  of  the  kind  of  paper 
that  it  was  prepared  to  handle,  and  the  number  of 
finance  bills  current  had  been  drastically  reduced. 
But  this  is  a  matter  which  requires  constant 


106  THE  MEANING  OF  MONEY 

vigilance.  It  is  not  good  business  for  the  London 
market  to  give  credits,  too  readily  and  too  cheaply, 
against  securities  that  could  not  easily  be  realized, 
to  customers  whose  demands  for  cash  are  likely  to 
be  at  any  moment  inconvenient.  The  problem  of 
gpld  reserves,  of  which  we  hear  so  much  from  time 
to  time,  is  only  one  side  of  a  very  big  and  many- 
sided  question;  another  side  is  the  necessity  for 
holding  only  the  most  readily  realizable  assets, 
and  yet  another  is  the  need  for  vigilance,  common 
sense  and  promptitude  in  the  regulation  of  the  price 
of  bankers'  money.  The  double  responsibility  that 
the  English  money  market  has  to  face,  of  pro- 
viding credit  and  currency  for  its  home  customers, 
and  of  meeting  drafts  on  London  from  all  parts  of 
the  world,  in  gold  on  demand,  makes  its  functions 
doubly  interesting.  And  these  functions  will  be 
most  simply  set  forth  by  means  of  a  description 
of  the  various  members  which  compose  its  body. 

The  chief  and  most  important  members  of  the 
London  money  market  are  the  banks,  bill-brokers 
and  discount  houses,  accepting  houses  and  foreign 
bankers,  all  of  which  are  clustered  round  the 
central  figure,  the  Bank  of  England.  Their  mutual 
relations  and  duties,  and  the  manner  in  which  the 
Bank  of  England  regulates  the  action  of  the  rest, 
can  only  be  understood  when  we  have  seen  with 
what  class  of  work  each  of  them  is  busied. 


CHAPTER  VII 

THE  CHEQUE-PAYING  BANKS 

WE  have  now  considered  the  various  forms  of  cash 
money,  and  the  process  of  the  manufacture  of  the 
money,  or  right  to  draw  a  cheque,  which  is  dealt  in 
by  lenders  and  borrowers  in  the  money  market. 
And  we  have  seen  that  the  right  to  draw  a  cheque 
in  England  carries  with  it  the  immediate  and 
invariable  right  to  demand  gold,  and  so  makes 
London  the  monetary  centre  of  the  world,  since 
elsewhere  this  free  convertibility  of  the  currency 
of  the  country  is  not  to  be  relied  on  with  the 
same  certainty.  The  tremendous  responsibility 
undertaken  by  the  London  money  market  is  thus 
apparent,  and  we  have  now  to  examine  the  various 
wheels  of  the  great  machine  by  means  of  which  it 
carries  on  business. 

In  our  chapter  on  the  manufacture  of  money  we 
formed  a  distant  acquaintance  with  the  greatest  of 
these  wheels,  when  we  saw  that  the  cheque  cur- 
rency of  England  is  manufactured  by  the  banks, 
largely  through  the  loans  and  discounts  by  means 
of  which  they  create  deposits  which  represent 


! 


io8  THE  MEANING  OF  MONEY 

mutual    indebtedness    between    them    and    their 
customers. 

The  provision  of  currency  has  thus  passed  into 
the  hands  of  the  other  banks,  and  the  Bank  of 
England's  note  issue  is  chiefly  used  as  a  basis  of  the 
cheque  currency  which  they  provide,  that  is,  is  held 
in  reserve  by  them  to  meet  cheques  that  may  be 
presented  for  payment  in  legal  tender  cash— jiotes 
or  gold.  Before  we  go  further,  however,  we  must 
make  sure  of  what  we  mean  when  we  talk  or  write 
about  the  banks.  I  have  headed  this  chapter 
"  Cheque-paying  Banks,"  manufacturing  a  very  ugly 
phrase  in  the  hope  that  it  may  be  clear.  For  it 
may  be  said  that  the  essential  function  of  English 
banking,  which  differentiates  it  from  other  insti- 
utions  which  are  very  nearly  but  not  quite  banks, 
s  this  fact  that  it  gives  its  customers  the  right  to 
raw  cheques  against  credits  arising  sometimes 
rom  the  deposit  of  cash,  more  often  from  advances 
against  security  or  the  discounting  of  bills,  and  is 
repared  to  meet  these  cheques  on  presentation 
by  paying  coin  or  notes  across  the  counter.  The 
phrase  cannot  claim  the  watertight  completeness 
of  a  logical  definition,  but  it  is  roughly  descriptive. 
It  includes  the  country  banks,  which  in  their  turn 
bank  with  the  London  banks.  The  cheque-paying 
banks,  in  short,  for  the  purposes  of  this  inquiry 
must  be  taken  to  include  the  native  banks  of  this 
country,  with  the  exception  of  the  Bank  of  England, 


EARLY  EXPERIENCES  109 

which  may  be  regarded  either  as  the  foundation  of 
the  banking  edifice  or  as  a  pinnacle  on  its  summit, 
but  in  any  case  stands  by  itself.  But  they  do  not 
include  the  merchant  firms  and  accepting  houses, 
who  do  a  business  which  is  often  described  as 
banking,  but  do  not  meet  cheques  drawn  on  them 
with  legal  tender  cash,  but  with  a  cheque  drawn  on 
one  of  the  banks  which  we  classify  as  cheque  paying. 
It  need  not  be  said  that  banking  groped  its  way 
to  its  present  perfection  through  many  difficulties 
and  mistakes.  A  Royal  Commission  which  in- 
quired into  the  subject  in  the  early  part  of  the 
nineteenth  century  laid  bare  the  fact  that  in  1793 
more  than  a  hundred  English  country  banks  failed, 
and  that  in  1810  to  1817  six  hundred  closed  their 
doors.  Novelists  of  earlier  generations  made 
effective  use  of  bad  banking  in  the  plots  of  their 
novels,  and  actual  fact  was  even  more  romantic 
than  fiction  in  the  days  when  the  speed  of  a  post- 
chaise  full  of  bullion  might  save  a  bank  which  was 
troubled  by  a  run,  and  difficulties  of  transport 
were  increased  by  the  highwaymen  who  infested 
the  roads.  In  1793  "a  general  panic  was  raging  in 
London ;  many  bankers  failed,  some  of  whom  acted 
for  their  northern  brethren.  Fresh  London  agents 
had  to  be  appointed  and  duly  advertised  in  the 
local  papers.  This  helped  to  spread  alarm.  Every 
holder  of  a  note  was  anxious  to  convert  it  into 
gold.  Scores  of  country  bankers  were  in  London, 


Iio  THE  MEANING  OF  MONEY 

trying,  by  any  means,  to  gather  the  precious  metal, 
with  which,  when  obtained,  they  immediately  posted 
home,  disregarding  the  perils  of  robbery  on  the 
road.  The  very  bank  that  had  reported  '  all  quiet 
and  undisturbed '  on  the  2Oth  had  before  the  close 
of  the  month  (March)  first  a  clerk  and  then  two 
partners  in  London  seeking  gold,  a  supply  of  which 
they  obtained  and  carried  north  with  all  speed. 
Mr.  Rowland  Burdon,  partner  in  the  Exchange 
Bank,  Newcastle,  was  in  the  metropolis  upon  the 
same  mission.  On  the  return  journey  his  post- 
chaise  was  stopped  by  footpads,  who  pinioned  the 
banker  and  rifled  his  pockets.  The  bullion  fortu- 
nately escaped  their  notice."  * 

It  is  recorded  in  the  interesting  work  just  quoted 
that  the  great  banking  family  of  Backhouse  of 
Darlington  were  wont,  when  they  found  it  neces- 
sary to  replenish  their  gold  store  and  were  anxious 
to  avoid  the  suspicions  that  would  be  aroused  if 
they  were  known  to  be  doing  so,  to  drive  quietly 
off  in  a  gig  as  if  about  to  visit  a  local  meeting  and 
to  change  into  a  post-chaise  and  four  at  Scotch 
Corner,  a  noted  place  on  the  North  Road.  The 
practice  throws  an  interesting  light  on  the  extreme 
care  which  had  to  be  exercised  by  bankers  in  early 
days  in  order  to  do  nothing  which  could  possibly 
excite  suspicion.  And  having  mentioned  the  Back- 
house family  I  cannot  avoid  the  well-known  story 
*  Maberly  Phillips,  "  History  of  Backs,  Bankers  and  Banking." 


BALANCING  THE   CASH  in 

of  the  attempt  made,  according  to  legend,  by  Lord 
Darlington  early  in  the  nineteenth  century  delibe- 
rately to  break  their  bank.  It  is  stated  that  he 
actually  instructed  his  tenants  to  pay  him  their 
rents  in  Backhouse  notes,  meaning  when  he  acquired 
a  sufficient  number  of  them  to  present  them  all  at 
once,  demand  gold,  and  so  make  the  bank  put  up 
its  shutters.  Jonathan  Backhouse  was  apprised  of 
this  intention,  and  went  off  to  London  post-haste 
for  the  necessary  supply  of  gold.  On  his  way 
back  one  of  the  fore-wheels  came  off  the  chaise, 
and  rather  than  wait  to  have  the  wheel  replaced 
the  banker  piled  the  gold  at  the  back  part  of  the 
chaise,  so  "balancing  the  cash"  and  driving  into 
Darlington  upon  three  wheels.  "By  this  sudden 
coup  the  bank  was  so  well  provided  with  specie 
that  when  Lord  Darlington's  agent  presented  a 
very  large  parcel  of  notes  they  were  all  promptly 
cashed,  the  Quaker  quietly  remarking,  '  Now  tell 
thy  master  that  if  he  will  sell  Raby,  I  will  pay  for 
it  with  the  same  metal.' "  * 

Finally,  I  must  risk  still  further  the  charge  of 
irrelevant  anecdotage  by  telling  the  story  of  the 
man  who  came  down  the  steps  of  his  bank,  the  door 
of  which  had  been  closed  against  him,  stumbled 
under  the  shock  of  his  ruin  into  the  arms  of  a  friend, 
and  apologized  by  saying,  "  The  fact  is,  I  had  lost 
my  balance." 

*  Ibid. 


H2  THE  MEANING  OF  MONEY 

It  would  be  pleasant  to  linger  over  the  romance 
and  humours  of  the  primitive  days  of  banking,  but 
it  is  perhaps  still  pleasanter,  and  certainly  more 
profitable,  to  record  that  both  the  comic  and  tragic 
side  of  bank  failures,  as  a  common  experience,  are 
to  the  present  generation  only  a  matter  of  traditioa 
And  yet  they  are  not  really  a  matter  of  very  ancient 
history,  and  I  have  talked  with  a  grey-haired 
manager  of  a  country  bank,  now  absorbed  into  a 
great  joint-stock  concern,  who  was  behind  his 
counter  during  a  run  and  asked  a  customer  who 
came  in  to  draw  his  balance  how  he  would  take  it, 
and  was  astonished  by  being  asked  for  the  bank's 
own  notes. 

The  improvement  in  English  banking  has  been 
coincident  with  the  development  of  joint-stock  bank- 
ing, a  fact  which  is  the  more  interesting  because 
it  was  noted  by  keen-eyed  Adam  Smith  .that  the 
joint-stock  system  is  particularly  well  suited  to  bank- 
ing. His  reasons  are  worth  quoting.  "  Though," 
he  says,  "the  principles  of  the  banking  trade 
may  appear  somewhat  abstruse,  the  practice  is 
capable  of  being  reduced  to  strict  rules.  To  depart 
upon  any  occasion  from  these  rules,  in  consequence 
of  some  flattering  speculation  of  extraordinary 
gain,  is  almost  always  extremely  dangerous,  and 
frequently  fatal  to  the  banking  company  which 
attempts  it.  But  the  constitution  of  joint-stock 
companies  renders  them  in  general  more  tenacious 


JOINT-STOCK  BANKING  113 

of  established  rules  than  any  private  co-partnery. 
Such  companies,  therefore,  seem  extremely  well 
fitted  for  this  trade."* 

Apart  from  this  regular  working  by  rule  and 
tradition,  joint-stock  companies  have  for  some  time 
been  subjected  to  greater  publicity  than  private 
firms.  When  there  is  a  large  body  of  share- 
holders, it  is  impossible  to  maintain  the  same  digni- 
fied secrecy  and  reserve"co"ric'erning  the  posltiornjf 
a  business,  which  is  generally  observed  by  private 
enterprises :  and  any  bank  which  has  to  issue  a 
statement  of  its  position  is  bound  to  issue  a  strong 
one,  or  it  would  at  once  be  the  subject  of  cavil  and 
suspicion,  which  might  have  unfortunate  results. 
Hence  it  is  that  publicity  has  compelled  the  banks 
to  keep  themselves  strong,  in  wholesome  fear  of  the 
criticism  of  their  rivals  and  of  other  members  of 
the  monetary  body.  A  good  balance-sheet  was  soon 
seen  to  pay  those  who  produced  and  published  it, 
and  the  banks  found  that  by  giving  publicity  to 
their  position  they  gained  and  maintained  public 
confidence :  so  much  so  that  nearly  all  the  private 
banks,  though  not  bound  to  do  so  by  law,  now 
publish  annual  or  half-yearly  balance-sheets. 

Publicity  has  thus  done  much  for  banking,  and 

its  good  effects  are  generally  recognized  by  the 

most  enlightened  bankers  of  to-day,  some  of  whom 

are  strong  advocates  for  its  extension.    The  regular 

*  "Wealth  of  Nations,"  book  v.,  chapter  i. 

I 


114  THE  MEANING  OF  MONEY 

publication  of  half-yearly  balance-sheets  was  a  great 
step  forward.  But  much  may  happen  between 
January  i  and  June  30,  and  again  between  July  I 
and  New  Year's  Eve,  and  the  freedom  and  facility 
with  which  the  English  system  of  banking  works 
is  a  temptation  to  bankers  to  employ  too  freely  the 
admirable  machinery  with  which  they  supply  credit 
and  currency  to  the  commercial  and  financial  com- 
munity, and  to  build  up  too  big  a  basis  of  credit  on 
too  small  a  foundation  of  cash.  The  fact  that  their 
doing  so  facilitates  trade  and  finance  and  quickens 
the  wheels  of  commerce  all  the  more  efficiently,  as 
long  as  no  untoward  result  follows,  makes  it 
difficult  to  advocate  reform  without  affecting  the 
interests  of  a  large  and  powerful  multitude,  and 
also  necessitates  the  greatest  care  in  dealing 
with  a  very  delicate  and  difficult  subject.  Never- 
theless, it  must  be  remembered  that  trade  and 
speculation  that  are  based  on  inflated  .  credit  and 
inadequately  secured  currency  carry  with  them 
dangers  that  are  unpleasant  to  contemplate  even  in 
imagination,  and  it  may  also  be  contended  that  the 
strength  of  the  resistance  to  the  more  frequent 
application  of  publicity  to  the  position  of  the 
bants  is  in  itself  a  sufficient  evidence  of  the  urgent 
necessity  of  the  reform. 

It  has  long  been  recognized  that  it  is  the  duty 
of  currency-creating  banks  to  issue  frequent  state- 
ments of  their  position.  The  Bank  of  England  has 


PUBLICITY  115 

published  a  weekly  account  regularly  ever  since 
the  Act  of  1844;  the  Bank  of  France  does  the  same, 
and  so  do  all  the  chief  Continental  banks  of  issue. 
And  in  New  York,  where  there  is  no  central 
bank,  there  is  a  weekly  statement  of  the  position 
of  the  Associated  Banks.  It  may  be  contended  that 
since  the  Bank  of  England  makes  this  weekly 
statement,  and  is  the  keeper  of  the  ultimate  reserve 
of  the  country,  all  that  is  necessary  is  already 
done,  and  that  English  banking  is  in  this  respect 
quite  as  subject  to  publicity  as  its  Continental 
counterpart.  But  the  conditions  in  England  are 
wholly  different,  for,  as  we  have  seen,  the  develop- 
ment of  the  use  of  cheques  in  England  has  reduced 
the  position  of  the  Bank  of  England's  note  issue  to 
one  of  quite  secondary  importance  as  currency, 
and  has  made  the  banks  on  which  the  cheques 
are  drawn,  the  chief  creators  of  currency  for 
this  country.  The  publication  of  the  Bank  of 
England's  weekly  account  shows  how  much  gold  it 
has,  and  how  many  notes  it  has  issued  against  it, 
but  tells  us  nothing  as  to  how  much  credit  the  other 
banks  have  built  up  on  the  basis  of  this  gold  and 
these  notes. 

After  the  crisis  of  ,1890,  which  was  faced  with 
most  satisfactory  equanimity  by  the  English  banks, 
the  late  Lord  Goschen  urged  on  the  bankers  the 
desirability  of  a  higher  proportion  of  cash  reserves, 
and,  doubtless  observing  that  in  order  to  maintain 


n6  THE  MEANING  OF  MONEY 

a  continually  higher  standard,  more  frequent  pub- 
licity was  essential,  asked  for  monthly  statements. 
His  suggestion  was  immediately  adopted  by  most 
of  the  principal  London  banks.  This  was  some- 
thing gained,  but  the  partial  nature  of  the  reform 
robbed  it  of  much  of  its  advantage,  and  attached  to 
it  obvious  evils  and  unfairness.  None  of  the  private 
banks  followed  Lord  Goschen's  hint,  and  one  of  the 
greatest  of  them,  which  has  since  joint-stocked  itself 
in  conjunction  with  a  large  number  of  other  private 
firms,  still  remains  outside  the  circle  of  monthly 
publishers  of  statements.  And  none  of  the  country 
banks,  with  which  the  country  branches  of  the 
London  banks  are  in  continual  competition  in  one 
place  or  another,  considered  that  Lord  Goschen's 
admonition  in  any  way  concerned  them. 

The  bankers  who  had  followed  it  were  thus 
placed  at  a  disadvantage,  if  it  be  a  disadvantage  to 
have  an  incentive  applied  to  them  in  the  direction 
of  prudent  banking.  And  it  must  be  admitted  that 
from  the  point  of  view  of  earning  dividends  and 
obliging  customers,  that  banker  is  temporarily 
favoured  who  has  least  inducement  to  restrict  his 
credits  according  to  the  dimensions  of  his  cash, 
though  ultimately  he  runs  all  the  greater  risk  of 
being  a  danger  to  himself  and  to  the  rest  of  the 
community. 

Certainly  the  banks  which  do  publish  monthly 
statements  of  their  position  appear  to  regard  the 


A  PARTIAL  REFORM  117 

fact  as  a  handicap  to  which  their  competitors  are 
not  subjected,  and  the  reluctance  of  the  latter  to 
join  the  movement  is  presumptive  evidence  in 
favour  of  the  view  that  they  make  an  unfair  use  of 
their  comparative  freedom  from  publicity.  If  this 
be  so,  there  is  clearly  all  the  more  reason  why 
publicity  should  be  applied  to  them. 

Moreover,  it  has  become  evident  that  even 
monthly"  statements  are  insufficient  if  they  are  to 
show  the  position  on  one  day  only,  the  day  on 
which  the  statement  is  made  out,  and  are  not  to 
give  some  evidence  of  the  relation  between  the 
banks'  cash  and  liabilities  throughout  the  period 
covered.  A  periodical  "tightness  of  money,"  as 
Lombard  Street  calls  it,  towards  the  end  of  every 
month,  when  the  monthly  statements  of  the  publish- 
ing banks  are  being  prepared,  leads  irresistibly  to 
the  conclusion  that  some  of  them  calMn  loans  or 
diminish  discounts,  .and  so  increase  their  cash 
holding  in  order  to  make  their  position  stronger 
on  the  day  of  its  publication.  One  of  them,  the 
London  and  County,  in  order  to  show  that, it  at 
least  is  no  party  to  this  system  of  publishing 
misleading  statements,  adopted  early  in  1908  the 
practice  of  giving  the  amount  of  its  daily  average 
cash  holding  throughout  the  month,  and  has  thus 
led  the  way  towards  the  abolition  of  a  practice 
which  is  obviously  quite  unworthy  of  the  high 
traditions  of  English  banking. 


ii8  THE  MEANING  OF  MONEY 

It  might,  perhaps,  be  unfair  to  expect  all  the 
banks  to  give  a  full  statement  of  the  daily  average 
position  of  their  cash  and  deposits,  owing  to  the 
extra  amount  of  clerical  work  involved,  and  an 
efficient  alternative  was  advocated  a  few  years  ago 
by  a  distinguished  chairman  of  the  Bankers'  In- 
stitute in  the  course  of  a  presidential  address,  in 
which  he  suggested  that  all  banks  should  publish 
a  weekly  statement. 

The  present  system  by  which  publicity  is  applied 
to  banking,  once  a  year  in  some  cases,  once  a  half- 
year  in  others,  and  once  a  month  in  others,  is  clearly 
illogical  and  unfair,  and  the  fact  that  obstinate  re- 
I  sistance  is  offered  to  publicity,  especially  by  certain 
S  of  the  country  banks,  only  shows  how  necessary  is 
/  its  application. 

As  will  be  seen  later,  the  question  is  intimately 
connected  with  the  wider  problem  of  the  collective 
gold  reserve,  and  it  has  been  insisted  over  and  over 
again  by  practical  and  distinguished  bankers  that 
the  proportion  of  cash  to  liabilities,  in  the  case 
especially  of  some  of  the  country  banks,  is  in- 
adequate, and  that  periodical  publication  of  their 
position  is  an  important  step  towards  a  remedy  for 
this  evil  All  that  is  asked  of  the  banks  is  that  they 
should  show  what  they  are  doing,  and  the  reluctance 
of  some  of  them  to  do  so  is  not  a  favourable  sign. 

The  fact  that  the  great  majority  of  the  banks  do 
give  adequate  attention  to  the  relation  between 


(\ 


OPPOSITION  TO  PUBLICITY  119 

their  cash  and  their  liabilities  rather  increases  the 
difficulties  of  the  question,  because  it  brings  into 
being  a  school  of  thought  which  maintains,  after  the 
manner  of  Doctor  Pangloss,  that  all  is  for  the  best 
in  the  best  of  all  possible  banking  worlds,  and 
resents  any  suggestion  of  improvement  as  an 
impertinent  intrusion;  but  these  optimists  must 
remember  that,  if  ever  banking  trouble  should  arise 
in  this  country,  they  must  not  expect  the  public  to 
discriminate  too  nicely  between  the  good  banks  and 
the  less  good,  so  that  an  indiscretion  on  the  part  of 
a  weaker  brother  might  cause  serious  inconvenience 
to  bankers  of  the  most  strait-laced  virtue.  But  the 
more  frequent  publication  of  accounts  is  a  matter 
which  will  inevitably  be  settled,  and  let  us  leave  it 
with  the  hope  that  the  next  step  will  not,  like  the 
last,  be  taken  by  the  banking  world  as  the  result  of 
crisis. 

It  has  already  been  stated  that  the  great  im- 
provement in  English  banking,  which  has  changed 
the  picturesquely  exciting  system  illustrated  at  the 
beginning  of  this  chapter  for  one  of  monotonous 
solidity,  has  coincided  with  the  development  of 
banking  by  joint-stock  companies.  And  it  is  in- 
teresting to  note  that  the  law  of  the  land,  as  far  as 
it  could,  presented  an  insuperable  obstacle  to  this 
development.  It  gave  a  monopoly  of  joint-stock 
banking  in  London  to  the  Bank  of  England,  but  it 
defined  banking,  as  banking  was  when  this  monopoly 


120  THE  MEANING  OF  MONEY 

was  given,  as  the  right  to  issue  notes.  But  when 
the  nature  of  banking  changed,  and  it  became 
the  business  of  a  banker  not  to  give  a  customer  a 
credit  and  let  him  take  out  notes,  but  to  give  a 
customer  a  credit  and  let  him  draw  cheques,  it  was 
perceived  that  the  Bank  of  England's  monopoly  did 
not  prevent  the  establishment  of  joint-stock  banks 
in  London ;  and  so  the  law,  in  spite  of  its  manifest 
intention,  was  practically  annulled  by  a  change  in 
banking  practice  which  its  framers  could  not 
possibly  have  been  expected  to  foresee. 

It  was  in  1834  that  this  discovery  bore  fruit  in 
the  foundation  of  the  London  and  Westminster 
Bank,  and  since  then  it  may  be  said  that  English 
banking  has  passed  into  the  hands  of  the  joint-stock 
banks  by  their  rapid  development,  by  the  readi- 
ness with  which  they  absorbed  the  old  private 
banking  firms,  and  finally  by  the  action  of  a  large 
number  of  the  latter,  which  were  amalgamated  in 
1896  into  a  great  joint-stock  bank,  named  Barclay 
and  Company,  after  the  principal  firm  among  its 
components. 

The  distinguishing  feature  of  the  new  banking 
which  has  thus  grown  up  is  the  system  of  banking 
by  branches.  In  former  days  each  bank  stood  by 
itself  with  its  customers  all  in  one  neighbourhood, 
and  if  it  had  branches  they  were  quite  few _and  con- 
fined within  a  comparatively  small  area.  The  new 
banking  opens  branches  all  over  the  country,  or 


BANKING  BY  BRANCHES  i±i 

the  interests  of  other  banks,  and  seems  to 
seek  to  diffuse  its  business  as  widely  as  possible. 
The  consequence  is  that  English  banking,  instead 

of  consisting  of  a  large  number  of  small  firms  or 
companies  providing  monetary  facilities  each  for 
its. little  band  of  customers,  has  been  systematized 
into  a  compact  arm vr  composed  of  a  few  well- 
regulated  and  strongly  equipped  regiments,  each 
of  which  has  its  companies  and  outposts  scattered 
up  and  down  a  big  area,  but  worked  from  a  common 
centre,  and  with  excellently  organized  arrange- 
ments by  which  the  needs  of  each  district  can  be 
watched  over  and  provided  for. 

This  development  has  great  advantages,  the 
most  obvious  of  which  is  the  imposing  magnitude 
of  the  gigantic  modern  banks  as  compared  with  the 
pigmy  firms  of  the  old  system  of  separate  entities. 
Since  the  banker  trades  on  public  confidence^and 
size  is  the  most  impressive  quality  for  striking  the 
public  imagination,  the  process  of  amalgamation 
and  branch  building  has  certainly  strengthened 
banking  in  a  most  important  respect.  And  it 
need  hardly  be  said  that  it  has  also  done  a  great 
work  in  regulating  the  ebb  and  flow  of  monetary 
facilities  and  providing  a  number  of  channels, 
all  connected  with  the  central  reservoir,  by  which 
the  process  of  financial  irrigation  can  be  most 
easily  and  cheaply  conducted,  and  the  supply  can 
most  readily  be  applied  to  any  part  that  may 


122  THE  MEANING  OF  MONEY 

happen  to  be  suffering  from  drought.  As  long  as 
all  goes  well  in  the  world  of  banking  the  present 
system  will  readily  be  acknowledged  to  be  a  great 
improvement  on  its  predecessor. 

At  the  same  time,  it  must  not  be  forgotten  that 
this  multiplication  of  bank  branches  has  also 
multiplied  the  number  of  points  at  which  the  bank- 
ing body  is  vulnerable,  and  that,  if  it  should  so 
happen  that  all  did  not  go  quite  well  in  the  banking 
world,  and  every  branch  open  became  a  sucker 
instead  of  a  feeder,  the  magnitude  of  the  defenders' 
task  would  be  greatly  increased  by  the  diversity 
of  the  outlets  for  the  banks'  life-blood.  A  cash 
reserve  which  would  be  adequate  enough  for 
an  institution  which  keeps  all  its  liabilities  under 
one  roof  may  easily  be  meagre  for  one  which  has 
smaller  liabilities  scattered  over  different  points  in 
a  score  of  counties. 

From  this  point  of  view  the  size  of  a  bank,  which 
is  so  striking  an  indication  of  solidity  in  the  eyes 
of  the  uninstructed,  presents  a  different  aspect  on 
closer  examination.  For  it  is  usual  to  measure  the 
size  of  a  bank  by  its  deposits,  in  other  words  by  its 
liabilities,  and  by  the  number  of  its  branches.  And 
when  the  liabilities  are  not  only  great  but  wide- 
spread, they  become  still  more  misleading  as  a  test 
of  greatness.  In  estimating  the  wealth  of  an  indi- 
vidual we  should  hardly  begin  by  enumerating  the 
number  of  millions  that  he  owed,  and  the  number 


WIDESPREAD   LIABILITIES  123 

of  places  in  which  he  owed  them.  We...  should 
admire  the  magnitude  of  his  credit  operations,  but 
in  assessing  his  solidity  we  should  most  of  all  want 
to  know  how  liquid  were  the  assets  which  he  held 
against  this  mass  of  debt.  And  so  with  banks.  The 
bigger  they  are,  and  the  more  widely  scattered 
their  places  of  business,  the  greater  is  their  need 
for  prudence  and  foresight.  It  need  not  be  said 
that  these  platitudes  are  fully  recognized  by  those 
in  charge  of  the  many-branched  banks. 

We  have  seen  that  the  banks,  by  creating  the 
cheque  currency  with  which  English  commerce  and 
finance  is  now  conducted,  play  a  supremely  impor- 
tant and  responsible  part  in  the  domestic  economy 
of  the  London  money  market.  But  this  is  only 
one  side  of  their  importance.  They  also,  in  normal 
times,  that  is,  at  times  in  which  it  is  not  necessary 
for  the  Bank  of  England  to  intervene  and  control 
the  position,  regulate  the  price  of  money  in  London 
as  indicated  by  the  rate  for  day-to-day  loans  and 
short  fixtures,  and  the  discount  rates  for  bills  of  all 
dates.  To  a  certain  very  limited  extent,  it  is  true, 
they  are  controlled  or  affected  at  all  times— or  at 
nearly  all  times— by  the  Bank  of  England's  official 
rate,  because  the  allowance  that  they  make  to 
depositors  for  the  use  of  their  money  is  generally 
— though  not  invariably — 1£  per  cent,  below  Bank 
rate.  But,  besides  the  funds  which  they  hold  on 
deposit,  they  also  have  very  large  sums  left 


124  THE  MEANING  OF  MONEY 

with  them  on  current  account,*  on  which  they  in 
most  cases  pay  no  interest  at  all,  so  that  it  often 
happens  that  they  can  and  do  lend  in  the  money 
market  at  a  lower  rate  than  they  pay  to  depositors. 
And  the  price  at  which  they  lend  in  the  money 
market  makes  the  market  rate  for  loans,  except  on 
quite  rare  occasions. 

It  seems  to  be  impossible  to  go  straight  forward 
in  this  inquiry,  and  now  we  must  pause  and  explain 
the  meaning  of  this  phrase,  the  market  rate  for  loans. 
If  I  may  be  allowed  to  express  it  with  a  view  to  clear- 
ness and  simplicity  rather  than  fulness  and  precision, 
it  means  the  rate  at  which  the  banks  are  prepared  to 
lend  money — or  the  right  to  draw  a  cheque — to  the 
bill-brokers.  The  bill-brokers  ought  to  be  explained 
too,  but  they  must  wait  for  the  next  chapter,  and  in 
the  meantime  can  be  described  roughly  as  specialists 
who  devote  themselves  to  discounting  bills,  or  act- 
ing as  intermediaries  in  the  discounting  of  bills.  If 
you  look  at  the  aggregate  bank  balance-sheet  drawn 
up  to  illustrate  our  chapter  on  the  manufacture  of 
money,  you  will  see  on  the  right-hand  side  among 

*  The  only  banks  which  at  present  separate  current  from 
deposit  accounts  in  their  balance-sheets  are — The  Union  of  London 
and  Smith's  Bank,  Messrs.  Glyn,  Mills,  Currie  &  Co.,  and  Messrs. 
Hoare.  On  June  30,  1908,  the  Union  owed  £24,204,000  on 
current  account,  and  £11,812,000  on  deposit  account,  the  former 
being  thus  rather  more  than  double  the  latter.  At  the  same  date 
Glyn's  current  accounts  were  £10,009,738,  and  their  deposit 
accounts  .£4,289,486.  On  July  6,  Messrs.  Hoare  showed  current 
accounts  £1,885,819,  and  deposit  accounts  £561,5 19. 


MARKET  RATE  FOR  LOANS  125 

the  assets  first  the  cash  in  hand  and  at  the  Bank  of 
England,  the  bank's  first  line  of  defence,  and  then 
"  loans  at  call  or  short  notice."  *  These  loans  are 
made  day  by  day  by  the  banks  to  the  bill-brokers, 
money  lent  to  whom  is  regarded  by  bankers  as  a 
second  line  of  defence,  since  it  is  habitually  placed 
either  "  at  call "  from  day  to  day  or  for  periods  which 
do  not  usually  exceed  a  week ;  and  can  thus,  in 
theory  at  least,  be  called  in  readily.  The  phrase  also, 
in  some  cases,  covers  loans  from  banks  to  stock- 
brokers ;  but  when  the  rate  for  money  is  quoted  in 
the  City,  it  usually  means  the  rate  between  banks 
and  bill  brokers.  And  any  one  who  reads  the  open- 
ing paragraph  of  a  newspaper  money  article  and  is 
puzzled  to  find  that  there  was  very  little  demand  for 
money,  and  day-to-day  loans  were  easily  to  be  had 
for  some  apparently  absurdly  unremunerative  rate, 
need  not  therefore  infer— as  sometimes  happens— 
that  a  great  revolution  has  been  effected  in  human 
nature,  and  that  money  is  no  longer  an  object  of 
man's  ambition.  The  phrase  generally  misleads 
those  who  are  not  used  to  City  jargon,  and  I  once 
heard  an  indignant  gentleman  in  a  railway  carriage 
vehemently  asserting  that  the  newspapers  talked 
infernal  nonsense,  because  he  had  apparently 
strayed  by  some  mistake  into  the  money  article  of 
the  one  that  he  had  been  reading,  and  had  learnt 
from  it  that  money  was  "unuseable,"  and  that 
*  p.  59- 


126  THE  MEANING  OF  MONEY 

balances  had  been  offered  in  vain  at  i  per  cent.  It 
appeared  that  he  had  spent  the  previous  day  in  a 
fruitless  endeavour  to  induce  his  bank  to  allow  him 
an  overdraft  on  the  security  of  certain  pictures, 
apparently  his  own  works,  and  of  quite  proble- 
matical value ;  he  had  offered  to  give  up  to  10  per 
cent,  for  the  accommodation,  and  was  so  deeply 
stirred  by  the  statement  that  there  was  no  demand 
for  money  at  i  per  cent,  that  he  roundly  dismissed 
all  City  journalists  as  unfit  even  to  be  art  critics, 
which  appeared  to  be  the  extreme  limit  of  condem- 
nation in  his  opinion. 

It  is  very  important  that  the  meaning  of  the  word 
"money"  as  used  in  the  City  should  be  clearly 
grasped,  for  we  shall  find  that  the  rate  for  this 
money  and  the  facilities  for  getting  it  are  most 
important  wheels  in  the  machine,  and  it  is  essen- 
tial to  keep  a  tight  hold  of  the  correct  significance 
of  the  phrase. 

Money,  then,  has  a  special  sense  when  spoken 
of  by  the  chief  dealers  in  it,  thus  presenting  yet 
another  example  of  the  confusing  inconsistencies  of 
economic  nomenclature.  In  this  sense  it  is  usually 
a  loan  granted  by  a  banker  to  a  bill-broker  for  a 
day  or  for  a  period  not  exceeding  a  week.  The_rate 
for  this  class  of  accommodation  thus  represents  the 
price  of  the  right  to  draw  a  cheque  given  to  a 
borrower  of  the  highest  possible  credit  against 
securities  of  the  highest  possible  class,  and  for  the 


THE  RATE  FOR  MONEY  127 

shortestjHiSsible-per-iod.  And  it  is  thus  quite  mis- 
leading to  draw  any  inference  from  it  concerning 
the  rate  that  ought  to  be  paid  under  different 
conditions. 

Thisjrate  istan-4tormal.times.  practically  decid e d 
by  the  cheque-paying  banks.  Other  lenders,  such 
"as  the  Indian  Government's  representatives,  or  the 
finance  houses  or  merchants,  sometimes  have  large 
balances  employed  among  the  bill-brokers,  but  the 
deciding  voice  concerning  the  value  of  the  rate  for 
short  loans  is  ultimately  that  of  the  banks.  And  it 
is  in  the  extreme  elasticity  of  this  rate  that  we 
begin  to  detect  the  great  difficulties  that  have  to  be 
coped  with  by  those  who  control  the  London  money 
market.  I  must  be  allowed  for  the  moment  to  beg 
the  question  tliat  the  London  money  market  has  to  be 
controlled,  and  to  add  that  many  of  the  difficulties 
of  London's  position  arise  from  the  fact  that  many 
members  of  the  money  market  do  not  adequately 
recognize  that  it  has  to  be  controlled,  and  that  even 
those  who  do  waver  constantly  between  the  horns 
of  a  dilemma  which  is  ever  present,  one  being  their 
own  immediate  interest,  and  the  other  that  of  the 
market  as  a  whole  and  in  the  future. 

For  example,  any  given  banker  at  any  given 
moment  may  most  reasonably  consider  that  the 
rate  at  which  he  lends  money  to  the  bill-brokers  is 
a  question  which  merely  concerns  himself  and  his 
duty  to  his  shareholders.  He  has  so  much  cash,  so 


128  THE  MEANING  OF  MONEY 

much  invested  in  securities,  so  much  advanced  to 
customers,  and  a  further  proportion  which  he  can, 
according  to  the  rules  by  which  he  regulates  his 
business,  lend  to  the  bill-brokers  at  call  or  short 
notice.  Any  rate  for  this  is  better  than  none,  and, 
if  the  bill-brokers  only  bid  him  i£  per  cent, 
for  it,  why  should  he  not  take  it  rather  than  lose 
the  profit  to  be  made  by  the  creation  of  so  much 
credit  ?  If  he  does  not,  he  will  very  probably  cause 
the  bill-brokers  to  go  across  the  street  and  bid  a 
rival  bank  if  per  cent,  and  the  only  result  of 
his  abstinence  will  be  to  swell  the  profits  of 
a  competitor.  From  the  point  of  view  of  the 
individual  banker  these  arguments  are  irrefutable. 
And  yet  it  is  much  to  be  desired  that  some 
system  could  be  devised  of  more  harmonious  agree- 
ment among  bankers  as  a  whole,  by  which  the  rate 
for  money,  in  the  City  sense  of  the  word,  could  be 
made  less  mercurial,  and  especially  could  be  pre- 
vented from  falling  to  a  merely  nominal  level,  and 
so,  as  we  shall  see,  unduly  depressing  discount  rates, 
encouraging  all  kinds  of  kite-flying  and  the  pro- 
duction of  finance  paper,  turning  the  foreign  ex- 
changes against  London,  and  increasing  the  diffi- 
culties of  those  responsible  for  the  maintenance  of 
the  gold  reserve. 

We  have  seen  that  the  banks  supply.  English 
commerce  and  finance  with  most  of  its  currency, 
and  also  regulate  the  price  of  money  in  the  money 


THE  DISCOUNT  RATE  129 

market.  But  we  have  not  nearly  exhausted  their 
important  functions.  They  also,  in  normal  times, 
are  chiefly  responsible  for  regulating  the  discount 
rate  in  London,  that  is,  the  rate  at  which  bills  of 
exchange  drawn,  as  described  in  a  previous  chapter, 
for  payment  at  a  fafope  dqftff,  pan  ***!  turned.  jnt6 
This  market  rate  of  discount  is 


an  even  more  momentous  matter  than  the  market 

rate  for  money,  because  it  has  a  very  important 

bearing  on  the  foreign  exchanges,  another  of  the 
complicated  questions  which  have  to  be  dealt  with 
later  on.  The  importance,  in  fact,  of  the  market 
rate  for  money  arises  largely  out  of  its  effect  on  the 
market  rate  of  discount;  if  the  bill-brokers  are 
supplied  freely  with  money  at  low  rates,  and  think 
that  they  see  a  probability  of  the  continuance  of 
this  free  and  cheap  supply  of  credit,  they  are 
naturally  encouraged  to  discount  bills  at  low  rates, 
so  that  the  banks  which  regulate  the  money  rate 
thus  exercise  a  strong  and  direct  influence  on  the 
discount  rate. 

But  they  also  exercise  a  still  stronger  and  more 
direct  one  by  being  themselves  large  discounters 
of  bills,  so  much  so  that  many  bill-brokers  contend 
that  it  is  the  bankers  who  directly  determine  the 
market  rate  of  discount.  And  this  is  probably  true, 
for  most  of  the  bill-brokers  are  chiefly  intermediaries, 
and  only  discount  bills  with  the  object  and  intention 
of  promptly  rediscounting  the  greater  number  of 


I3o  THE  MEANING  OF  MONEY 

Jjaenr;  and  t_he  bankers .  are .  the  ,  chief birj^rswith 
whom  they  can  most  regularly  count  on  placing 
the  bills  that  they  take ;  consequently,  when  it  is 
known  that  two  or  three  of  the  chief  banks  are  not 
taking  bills  below,  for  example,  3  per  cent.,  this 
fact  has  a  marked  effect  on  the  market  rate  of  dis- 
count, that  is,  the  rate  quoted  by  the  bill-brokers. 
And  as  the  market  rate  of  discount  is  an  important 
factor  in  influencing  the  foreign  exchanges,  which 
in  turn  are  an  important  factor  in  influencing  the 
inward  and  outward  movements  of  gold,  we  come 
round  once  more  to  the  great  importance  of  the 
policy  pursued  by  the  banks  with  regard  to  dis- 
counting bills. 

Still  more  important  and  delicate  do  their  duties 
become  when  there  arises  any  question  of  dis- 
criminating between  the  classes  of  bills  that  will  be 
taken,  whether  the  objection  be  to  bills  of  a  certain 
kind,  or  to  bills  drawn  on  a  certain  house.  By 
merely  intimating  to  the  bill  brokers  that  he  does 
not  want  many  *  "house  bills,"  or  many  bills  drawn 
on  a  certain  name,  or  that  he  is  not  taking  paper 
which  is  too  obviously  of  the  kite-flying  order,  a 
bank  manager  can  at  any  time  profoundly  affect  the 
inner  working  of  the  financial  machine.  The  exercise 
of  such  a  power  has  to  be  handled  with  the  nicest 
discretion,  for  any  such  intimation,  especially  when 
the  paper  of  any  particular  accepting  house  is 
*  Page  52. 


STOCK  EXCHANGE  LOANS  131 

objected  to,  generally  produces  a  good  deal  of 
gossip  and  conjecture,  and  is  certain  to  have  some 
effect  on  the  credit  of  the  firm  that  is  indicated  as 
having  been  accepting  more  heavily  than  its  re- 
sources are  considered  to  warrant. 

And  this  part  of  the  bankers'  duty  in  watching 
over  the  volume  of  acceptances,  and  seeing  that  the 
accepting  houses  do  not  overstep  the  bounds  of 
prudence,  is  complicated  by  the  fact  that  the  banks 
have  themselves  lately  taken  up  the  business  of 
acceptance  to  a  greatly  increased  extent.  But  this 
feature  in  their  business  will  be  more  fitly  discussed 
when  we  come  to  consider  the  position  and  function 
of  the  accepting  houses  as  such. 

Finally,  the  bankers  fulfil  a  highly  important 
function  by  providing  credit  facilities,  .for.  Stock 
Exchange  speculation.  This  they  do  both  directly 
and  indirectly.  Directly  by  making  loans  to  their 
customers  on  the  security  of  stocks  and  shares 
which  the  latter  buy,  not  as  investments,  but  be- 
cause they  think  they  will  rise  in  price,  or  will  return 
a  higher  rate  of  interest  than  the  rate  which  the 
banker  will  charjge|Jjjyyj^Ci4£U  and  indirectly  by 
making  loans  to  members  of  the  Stock  Exchange 
which  the  latter  employ  in  financing  the  speculative 
commitments  of  the  public.  The  rates  earned  by 
bankers  for  this  kind  of  accommodation  are  gene- 
rally profitable,  and  the  most  strait-laced  moralist 
would  hardly  question  their  right  to  provide  credit 


132  THE  MEANING  OF  MONEY 


for  this  purpose.  In  fact,  in  the  case  of  direct  loans 
to  his  ordinary  customers,  the  banker  need  not 
necessarily  know  that  the  transaction  is  intended 
for  speculation.  Let  us  suppose  that  you  arrange 
with  your  banker  for  an  advance  against  a  line  of 
Argentine  bonds,  which  you  want  to  buy  because 
you  think  you  see  a  chance  of  reselling  them  at  a 
profit,  or  because  you  can  buy  them  to  pay  you 
5  percent,  and  you  can  get  a  loan  from  your  banker 
at  3  per  cent,  and  pocket  the  difference  of  2  per 
cent  In  such  a  case,  as  far  as  your  banker  knows, 
you  may  want  the  credit  in  order  to  buy  a  house, 
or  to  engage  in  some  productive  commercial  opera- 
tion. Nevertheless,  in  most  cases  he  is  probably 
in  a  position  to  make  a  fairly  accurate  guess,  and 
when  he  is  lending  directly  to  members  of  the  Stock 
Exchange,  he  knows  well  that  in  nine  cases  out  of 
ten  he  is  financing  the  purchase  of  securities  by 
those  who  for  one  reason  or  another  are  not  in  a 
position  to  pay  for  them,  and  so  is  facilitating  the 
speculative  holding  of  stocks  as  opposed  to  the 
real  possession  of  them  by  investors  who  have 
paid  for  them  out  of  savings. 

By  performing  this  function,  within  due  limits, 
the  banker  is  carrying  out  a  perfectly  legitimate 
side  of  his  business,  and  assisting  operations  which 
are  beneficial  to  the  community  as  a  whole.  The 
majority  of  speculators  probably  lose  more  money 
than  they  make,  but  if  they  choose  to  indulge  in 


EFFECT  ON  PRICES  133 

this  expensive  form  of  amusement,  it  is  not  their 
banker's  business  to  interfere  with  it,  and  during 
the  course  of  the  process  they  are  unconsciously 
rendering  a  financial  service  by  promoting  the 
freedom  of  markets  and  facilitating  dealings  in 
securities. 

Nevertheless,  the  readiness  with  which  bankers 
can  place  credit  at  the  disposal  of  speculators 
sometimes  has  bad  effects,  which  have  to  be 
watched  for  carefully  by  those  who  regulate  the 
supply  of  it. 

For  example,  there  can  be  no  doubt  that  it  was 
an  important  cause,  among  others,  of  the  abnor- 
mally high  level  to  which  the  prices  of  well-secured 
stocks  were  forced  in  the  period  of  exceptionally 
cheap  money  in  1896-97,  when  Consols  touched  114, 
and  "  gilt-edged  "  securities  could  with  difficulty  be 
found  to  yield  the  buyer  2^  per  cent.  This  state 
of  things  was  a  great  hardship  to  the  real  investor, 
and  was  undoubtedly  brought  about  to  some  extent 
by  the  number  of  enterprising  folk  who  borrowed 
from  their  banks  at  i  per  cent,  or  so  against  gilt- 
edged  securities  yielding  2\  per  cent.,  and  pocketed 
the  difference  accruing  from  the  yield  on  the  stock 
and  the  profit  arising  from  the  advance  in  its  price, 
which  continued  merrily  up  to  a  point.  The  de- 
moralization of  the  gilt-edged  market,  dating  from 
that  golden  period,  and  quickened  by  subsequent 
wars  and  other  causes,  is  still  being  painfully 


134  THE  MEANING  OF  MONEY 

lived  down.  But  this  is  a  point  which  perhaps 
does  not  directly  concern  the  banker,  as  such, 
though  as  a  large  holder  of  securities  he  is  affected 
by  any  tendencies  which  warp  the  true  course  of 
markets.  Still,  he  is  quite  justified  in  arguing  that 
he  is  not  to  blame  if  his  customers,  by  the  use  that 
they  make  of  the  credit  that  he  gives  them,  pro- 
duce abnormal  effects  on  prices. 

More  to  the  purpose  is  the  fact  that  Stock 
Exchange  securities  are  only  to  a  limited  extent 
liquid,  that  is  to  say,  realizable  at  a  moment's 
notice,  and  that  the  more  a  banker  wanted  to  call 
in  credit  granted  against  them  the  less  liquid  they 
would  be.  It  was  once  gravely  contended  by  a 
gentleman  who  was  opposed  in  principle  to  the 
existence  of  Government  debts,  that  if  every  holder 
of  Consols  wanted  to  sell  at  once,  and  there  were 
no  buyers,  the  price  would  be  nil.  Which  is  one 
of  those  absurd  truisms  which  contain  their  own 
refutation  in  their  very  truthfulness,  but  never- 
theless are  only  caricatures,  so  grotesque  as  to  be 
unrecognizable,  of  a  very  real  fact.  In  this  case 
the  fact  is  the  less  exciting  platitude  that  the  more 
people  there  are  who  want  to  sell  stock,  and  the 
fewer  who  want  to  buy  it,  the  lower  its  price  will 
be,  and  the  less  easy  it  will  be  to  sell  it  at  all.  It  is 
boasted  that  the  market  in  Consols  is  so  free  that 
they  can  be  sold  on  Sunday.  And  there  are  other 
securities  enjoying  the  advantage  of  an  international 


NEGOTIABILITY  OF  STOCKS  135 

market,  that  is,  of  being  freely  dealt  in  in  Paris 
and  on  the  other  Continental  Bourses,  which  can 
really  be  disposed  of  at  any  time,  at  a  price.  But 
they  are  not  many,  and  in  times  of  difficulty  or 
crisis,  the  possibility  of  which  can  never  be  wholly 
absent  from  the  mind  of  a  prudent  banker,  it  is 
quite  conceivable  that  securities,  quoted  officially 
at  substantial  prices,  could  not  be  turned  into  cash 
on  any  terms,  and  that  the  lending  banker  might 
find  the  credit  that  he  had  granted  used  to  draw 
away  his  cash,  without  being  able  either  to  compel 
his  customer  to  repay  him  or  to  convert  the  col- 
lateral and  so  replenish  his  resources. 

From  this  it  must  not  be  inferred  that  bankers 
commit  any  indiscretion  in  conducting  this  class  of 
business.  All  these  matters  are  questions  of  degree, 
and  if  due  attention  be  given  to  the  class  of  security 
advanced  against,  and  the  extent  to  which  these 
transactions  are  entertained,  nothing  can  be  said 
against  them  by  a  reasonably  minded  critic.  As  we 
have  seen  in  a  previous  chapter,  the  finest  class  of 
security  for  a  banker  to  hold  or  to  finance  is  the 
bill  of  exchange  drawn  against  real  produce  of 
universal  consumption  which  is  moving  into  the 
hands  of  those  who  will  consume  it,  and  so  will 
pay  for  itself  in  due  course.  In  all  other  securities 
the  existence  of  a  buyer  to  meet  the  views  of  the 
seller  is  more  or  less  problematical.  However 
intense  the  panic,  the  human  race  must  be  fed 


136  THE  MEANING  OF  MONEY 

and  clothed,  but  the  extent  to  which  it  will  take 
securities  from  those  who  want  to  sell  them  will 
vary  in  an  inverse  ratio  to  the  severity  of  the  panic. 
And  though  it  would  be  absurd  to  argue  from  this 
ground  that  bankers  ought  to  hold  nothing  but 
produce  bills,  it  is  quite  relevant  that  the  limits  to 
the  negotiability  of  some  other  securities  should  be 
constantly  kept  in  view. 

This  chapter  has  grown  to  a  portentous  length, 
which  must  be  excused  owing  to  the  great  impor- 
tance of  its  subject.  "  I  am  always  willing  to  run 
some  hazard  of  being  tedious  in  order  to  be  sure 
that  I  am  perspicuous,"  said  Adam  Smith,  and  was 
fortunate  in  being  able  to  write  so  confidently.  I 
have  to  face  the  certainty  of  being  tedious,  and  can 
only  hope  that  I  run  some  hazard  of  being  per- 
spicuous. What  I  have  tried  to  make  clear  is  the 
enormously  important  function  of  the  cheque- 
paying  banks  in  the  English  money  market.  Reca- 
pitulated in  tabular  form  it  may  be  expressed 
thus  :— 

By  providing  their  customers  with  cheque- 
books they  create  the  currency  which  settles  the 
great  majority  of  commercial  and  financial  trans- 
actions and  much  of  the  retail  traffic  of  daily 
life. 

By  discounting  bills  and  making  advances  to 
bill-brokers  and  other  customers  they  create  the 
credits  by  which  commerce  and  finance  are  carried 

'""^P-7I«*P*W>P«*»*««^*V'.  .••svwwjLiuwii  i    iv  10 urn  mil        • n  •••^***-"h 


THE  FUNCTIONS  OF  THE  BANKS     137 

on ;  and  these  credits  become  in  turn  their  liabili- 
ties on  current  and  deposit  account. 

They  regulate,  in  normal  times,  the  current  rates 
for  money  in  London. 

They  regulate,  in  normal  times,  the  discount          / 
rates  current  in  London,  which  have  an  important 
effect  on  the  foreign   exchanges,   and  so   on  the 
maintenance  of  London's  gold  reserve. 

They  are  large  acceptors  of  bills,  and  so,  again, 
facilitate  commerce  and  create  instruments  which 
are  readily  convertible  into  cash  or  credit. 

By  advancing  to  customers  or  stockbrokers 
against  Stock  Exchange  securities  they  facilitate 
speculation,  and  thus  to  some  extent  affect  the 
prices  of  stocks  and  shares. 

It  is  a  tremendous  function,  and  it  follows 
obviously  that  the  cheque-paying  banks  are  in  the 
aggregate  the  most  important  members  of  the 
financial  body.  We  shall  find  that,  with  one  ex- 
ception, the  other  members  are  more  or  less 
dependent  on  them,  and  can  only  work  with  the 
assistance  of  the  credit  created  by  them.  The  one 
exception  is  the  Bank  of  England,  which  exercises 
special  functions  which  will  be  more  fully  described 
hereafter,  and  in  abnormal  times  regulates  the 
whole  course  of  the  money  market.  But  even  it 
derives  much  of  its  power  from  the  fact  that  it 
acts  as  banker  to  the  cheque-paying  banks. 


CHAPTER  VIII 

THE   BILL-BROKERS  AND   DISCOUNT  HOUSES 

WE  have  seen  that  the  main  functions  in  the  manu- 
facture of  credit  and  currency  are  performed  by  the 
cheque-paying  banks,  and  we  have  now  to  examine 
the  operations  of  several  minor  but  important 
subsidiaries,  which  the  specializing  tendency  of 
civilization  has  called  into  being. 

The  banks  manufacture  money  by  making  ad- 
vances, that  is,  giving  the  right  to  draw  cheques, 
against  all  kinds  of  security  and  by  buying  or, 
according  to  the  technical  phrase,  discounting  bills, 
that  is,  giving  the  immediate  right  to  draw  a  cheque 
or  cash  in  return  for  an  instrument  which  conveys 
the  right  to  cash  at  a  later  date.  The  bill-brokers 
appear  to  have  originally  performed  the  function  of 
intermediaries  between  the  banks  who  were  buyers 
of  bills  and  the  merchants  who  had  bills  to  dispose 
of.  This  function  they  still  carry  on  to  a  great 
extent,  and,  in  so  far  as  they  remain  bill-brokers, 
this  is  the  chief  part  of  their  business.  But  several 
distinctions  have  arisen  through  the  natural  ten- 
dency to  diversification  of  function,  and  it  may  now 


THREE  CLASSES  139 

be  said  that  there  are  roughly  three  classes  (rf  firms 
to  be  included  under  the  titles  which  head  this 
chapter. 

(1)  There  is  the  bill-broker  pure  and  simple,  who 
devotes  himself  entirely  to  taking  a  parcel  of  bills 
from  the  merchants,  accepting  houses,  foreign  and 
colonial  banks,  and  other  chief  agents,  who  receive 
them  in  batches  by  every  mail,  and  selling  them 
there  a^nd  then  on  the  best  terms  that  he  can  obtain, 
receiving  a  commission  for  his  pains,  and  for  his 
knowledge  of  the  market.     This  variety,  which  is 
the  real  survivor  of  the  original  bill-broker,  is  now 
comparatively  rare.     It  is  commonly  described  by 
the  term  "running  broker." 

(2)  There  is  the  retail  dealer  in  bills,  who  is  still 
generally~called  a  bill-broker,  put  does  not  work  on 
commission  but  buys  bills  outright,  either  from  the 
running  broker,  or  from  the  merchants  and  accepting 
houses,  or  from  foreign  correspondents,  but  never- 
theless does  not,  as  a  rule,  hold  them  himself  until 
they  mature,  but  sells  them  to  the  banks  and  other 
buyers,  selecting  the  dates  and  classes  of  paper  that 
the  several  buyers  may  happen  to  require.     From 
the  nature  of  his  business,  the  retail  dealer  requires 
more  capital  and  credit  than  the  bill-broker  pure  and 
simple,  because  it  may  sometimes  happen  that  his 
goods  may  remain  on  his  counter  for  more  or  less 
time,  until  they  happen  to  suit  the  fancy  of  a  pur 
chaser.     His  capital,  however,  is,  as  a  rule,  small 


140  THE  MEANING  OF  MONEY 

when  compared  with  the  volume  of  his  turnover, 
and  he  depends  on  credit,  most  of  which  is  advanced 
by  the  banks,  for  the  financing  of  the  bills  of 
which  he  daily  remains  the  holder.  It  will  be  re- 
membered that  the  banks  habitually  have  consider- 
able sums  lent  to  bill-brokers  "at  call  and  short 
notice,"  and  that  these  loans  were  described  as  their 
second  line  of  defence,  as  being  most  easily  called 
in.  Their  first  line  of  defence,  as  need  hardly  be 
repeated,  is  their  holding  of  "  cash  in  hand  and  at 
the  Bank  of  England." 

(3)  Out  of  the  retail  dealer  in  bills  has  grown 
the  discount  house,  an  institution  which  still  dpes  a 
certain  amount  of  retail  business,  but  is  at  the  same 
time  in  a  position,  owing  to  larger  capital  and  more 
extended  credit,  to  "run  a  much  bigger  book,"  as 
the  jargon  of  the  craft  would  phrase  it ;  that  is,  the 
discount  house  is  to  a  greater  extent  a  permanent 
holder  of  bills  and  depends  in  a  minor  degree  on 
the  momentary  fluctuations  in  the  price  of  credit. 
Nevertheless,  the  discount  houses  are  very  large 
users  of  borrowed  money,  and  regularly  announce 
rates  which  they  allow  to  depositors,  these  being 
generally  slightly  above  the  rates  offered  by  the 
banks.  Owing  to  this  fact,  of  the  slightly  better  rate 
allowed  by  them,  they  generally  have  the  control 
of  a  considerable  amount,  placed  on  deposit  with 
them  by  merchants  and  financiers,  but  at  the  same 
time,  though  their  dependence  on  credit  supplied 


FIRMS  AND   COMPANIES  141 

by  the  banks  is  not  as  great  as  in  the  case  of  the 
retail  dealer  in  bills,  it  is  still  sufficient  to  make 
a  serious  difference  to  their  operations,  whenever 
the  banks  have  occasion  to  reduce  their  loans. 

Having  thus,  for  the  sake  of  being  perspicuous, 
classified  and  distinguished  the  three  kinds  of 
dealers  in  bills,  we  may  proceed  to  eliminate  the 
real  bill-broker,  the  almost  obsolete  dealer  on  com- 
mission, and  to  apply  the  term  bill-broker  to  the 
two  classes  who  have  grown  out  of  him  and  are 
still  called  by  his  name,  in  accordance  with  the  con- 
sistently illogical  manner  in  which  the  City  applies 
titles  and  descriptions. 

As  we  have  seen,  the  distinction  between  the 
other  two  classes  is  solely  one  of  degree,  the  degree 
being  the  extent  to  which  they  hold  bills  perma- 
nently, and  depend  for  financing  their  operations 
on  credit  obtained  from  the  banks.  At  the  head  of 
the  body  stand  some  few  private  firms  of  old  stand- 
ing, great  wealth  and  first-rate  credit,  side  by  side 
with  two  big  companies  which  have  applied  the 
joint-stock  system  with  considerable  success  to  the 
business  of  dealing  in  bills,  and  an  old  firm  which 
has  now  been  joint-stocked,  but  whose  capital  is 
held  privately  and  in  few  hands.  Under  this  leader- 
ship the  market  is  compact  and  well-organized. 
The  business  is  one  which  requires  exceptional 
abilities  and  alertness,  and  the  market  rate  of 
discount  in  London  is  perhaps  the  most  sensitive 


I42  THE  MEANING  OF  MONEY 

and  trustworthy  barometer  of  international  mone- 
tary conditions. 

It  was  stated  in  the  last  chapter  that  the  market 
rate  is  regulated  in  normal  times  by  the  banks,  and 
we  have  now  seen  more  clearly  why  this  should  be 
so,  having  found  that  the  bill-brokers  depend  to  a 
great  extent  on  the  banks  both  to  supply  them  with 
credit  and  to  buy  bills  from  them.  Nevertheless, 
though  the  average  level  of  the  rate  is  thus  regu- 
lated, the  action  of  the  bill-brokers  themselves  has 
an  important  influence  on  its  daily  fluctuations  and 
so  may  make  a  considerable  difference  to  the  move- 
ments of  the  foreign  exchanges. 

In  order  to  realize  the  complicated  nature  of  the 
problem  that  has  to  be  solved  by  a  bill-broker  when- 
ever he  buys  or  sells  a  bill,  let  us  endeavour  to 
enumerate  some  of  the  chief  considerations  which 
determine  his  judgment  on  the  points  that  have  to 
be  borne  in  mind.  We  will  suppose  he  is  offered 
a  line  of  first-class  paper  due  in  three  months'  time, 
the  present  date  being  the  last  week  in  June. 

But  first  it  will  be  necessary  to  try  to  get  a  clear 
understanding  of  the  meaning  of  the  terms  in  which 
the  discount  market  expresses  the  conduct  of  its 
business. 

We  will  suppose  then  that  the  bill  is  offered 
to  the  broker  at  4  per  cent.,  that  is  to  say,  that 
4  per  cent,  per  annum  is  the  rate  of  interest 
which  is  deducted  from  the  face  value  of  the 


THE  A  B  C   OF  DISCOUNTS  143 

bill,  which  it  will  realize  in  three  months'  time,  in 
order  to  induce  him  to  give  cash  for  it.  In  other 
words,  he  is  asked  to  give  £99  to-day  for  each  £100 
in  the  amount  that  he  will  receive  on  presenta- 
tion of  the  bill  on  maturity.  As  the  calculation  of 
discounts  is  very  puzzling  to  the  uninstructed  in- 
quirer, perhaps  it  is  better  to  be  still  more  arith- 
metically elementary,  and  point  out  that  as  three 
months  is  a  quarter  of  a  year,  the  4  per  cent,  per 
annum  is  divided  by  four  to  arrive  at  the  dis- 
count for  three  months,  and  hence  it  is  that  since 
the  current  discount  rate  is  4  per  cent.,  we  must 
knock  £i  off  each  £100  of  the  bill's  face  value  on 
maturity  in  order  to  arrive  at  its  cash  value  on 
this  basis.  This  rough  calculation  is  only  an  illus- 
tration, of  course,  and  the  bill-broker,  or  his  clerks, 
will  work  the  problem  out  much  more  finely  on 
the  actual  number  of  days  in  the  bill.  What  ha$  tO» 
be  made  clear  is  the  fact  that  a  bill  is  a  security 
with  a  price,  just  like  the  stocks  dealt  in  and  quoted 
on  the  Stock  Exchange,  but  that,  instead  of  quoting 
the  cash  price  for  it,  the  market  quotes  the  discount 
or  the  difference  between  its  cash  price  and  its  face 
value  on  maturity.  It  is  quite  reasonable  and  simple 
when  one  thinks  it  out,  that  an  instrument  that 
will  realize  £100  in  three  months'  time  should  only 
be  worth  £99  at  the  present  moment,  if  4  per  cent, 
per  annum  be  the  current  rate  arrived  at  by  the 
higgling  of  the  money  market.  But  the  number 


144  THE  MEANING  OF  MONEY 

of  people  who  have  never  taken  the  trouble  to 
work  out  this  elementary  but  tiresome  problem, 
and  consequently  flounder  when  they  think  or  talk 
about  the  discount  market,  is  a  continual  astonish- 
ment, and  must  be  my  excuse  for  giving  so  much 
space  to  a  statement  which  is  about  as  informing 
as  i  +  i  =  2. 

Another  frequent  cause  of  confusion  in  this  con- 
nection, though  it  also  is  dissolved  by  a  moment's 
thought,  arises  out  of  the  fact  thatjthe^market 
is  described  as  firm  when  discount  rates  go  up, 
that  is,  when  the  price  of  the  bill  goes  down.  A 
firm  discount  market  would  result,  we  will  suppose, 
in  a  rise  in  the  discount  rate  from  4  to  4^  per  cent, 
and  the  result  of  this  would  be  that  the  cash  value 
of  a  bill  with  a  year  to  run  (for  the  sake  of  simplicity) 
would  fall  from  96  to  95 1.  It  is  quite  clear  and 
reasonable  that  if  money  is  more  valuable  the 
present  price  of  a  bill  that  will  not  mature  for  a 
year  becomes  less,  because  the  buyer  is  giving 
immediate  cash  in  return  for  the  promise  of  cash  a 
year  hence.  But  to  people  who  are  accustomed  to 
the  expressions  current  on  the  Stock  Exchange  the 
notion  of  a  firm  market  resulting  in  a  fall  in  the 
price  of  the  securities  handled  in  it  is  often  very 
confusing,  for  on  the  Stock  Exchange,  when  they 
talk  of  a  firm  market,  they  mean  one  in  which  there 
is  a  strong  demand  for  the  securities  handled  by 
it  and  a  consequent  rise  in  prices.  When  the 


A  PITFALL  145 

Consols  market  is  firm  Consols  go  up,  whenjjue.. 
"discount  market  is  firm  frills  go  down,  which  is 
only  another  way  of  saying  that  ..^jscnunt,  which  is 
ie  commodity  in  w*">h  tfefi  TTarlr<>t.  realty  deals, 


goesjijD.^ 

~~  'All  this 


ll  this  is  very  platitudinous,  but  I  have  known 
an  occasion  on  which  a  financial  journalist  was 
taken  to  task,  by  a  man  of  high  standing  in  the 
City,  for  stating  in  his  money  article  that  the 
discount  market  was  weak,  with  easier  rates,  owing 
to  the  scarcity  of  bills.  In  this  case  a  practical 
banker  of  many  years'  experience  had  fallen  into  this 
trap,  so  that  I  must  be  excused  for  giving  a  consider- 
able amount  of  space  to  the  endeavour  to  warn  less 
well-informed  inquirers  against  it.  A  moment's 
thought  shows  that  when  bills  are  scarce  and  in 
demand,  buyers  who  want  them  will  have  to  take 
them  at  lower  rates,  that  is,  at  higher  prices,  so  that 
the  newspaper  statement  objected  to  was  perfectly 
correct. 

Having  done  our  best  to  put  a  fence  round  this 
tiresome  pitfall,  let  us  return  to  our  bill-broker, 
who  is  still  wondering  whether  to  buy  a  parcel  of 
three  months'  bills  at  4  per  cent,  in  the  last  week  of 
June,  and  let  us  examine  a  few  of  the  principal 
factors  that  will  determine  his  decision. 

In  the  first  place  he  has  to  consider  the  immediate 
circumstances  of  the  market  and  the  prospect  of  his 
being  able  to  resell  the  bills  forthwith  at  a  profit, 

L 


146  THE  MEANING  OF  MONEY 

or  to  finance  them  comfortably  if  he  be  obliged  to 
retain 'thehL 

L  TKe  last  week  of  June  is  a  most  unencouraging 
period  from  this  point  of  view.  The  close  of  the 
two  halves  of  the  year  are  habitually  marked  by 
two  processes,  both  of  which  severely  restrict  the 
supply  of  credit  and  of  cash.  In  the  last  week  of 
June  and  the  last  week  of  December  an  enormous 
volume  of  actual  payments  is  made  throughout  the 
country,  increasing  materially  the  demands  on  all 
the  banks  for  cash,  and,  at  the  same  time,  a  large 
number  of  firms  and  companies,  including  some 
of  the  banks  themselves,  are  making  preparations 
for  their  half-yearly  balance-sheets,  that  is  to  say, 
reducing  credits  granted  to  customers,  and  so 
increasing  the  proportion  of  their  holdings  of  cash. 
As  there  is  not  enough  cash  to  meet  these  two 
demands,  it  is  nearly  always  necessary  for  the  Bank 
of  England  to  fill  the  gap;  and  in  the  period  im- 
mediately preceding  the  turn  of  the  two  half-years 
it  is  usual  for  borrowers  to  go  to  the  Bank  of  England 
and  obtain  credits  with  it  for  sums  which  sometimes 
amount  to  fifteen  or  twenty  millions.  Part  of 
these  credits  is  used  for  the  withdrawal  of  actual 
currency,  notes  and  gold,  for  the  cash  payments 
that  have  to  be  made  all  over  the  country ;  the  rest 
is  left  to  the  credit  of  the  borrower — or  some  one 
to  whom  he  transfers  it — in  the  books  of  the  Bank 
of  England,  and  the  financial  community  is  thus 


THE  IMMEDIATE  OUTLOOK  147 

enabled  to  show  a  fine  round  sum  of  "cash  injiand 
and  at  the  Bank  of  England,"  a  credit  in  the  Bank 
of  England's  books  being  universally  regarded  as 
quite  as  good  as,  and  much  safer  than,  so  many 
sovereigns  in  the  pocket. 

Our  bill-broker,  of  course,  has  no  need  to  think 
of  all  this ;  it  is  all  so  well  known  to  him  that  it  is 
part  of  his  being.  But  it  is  a  very  important  factor 
in  the  problem  that  he  is  debating.  For  thelirst 
consequence  that  arises  is  the  probability,  or  cef- 
tainty,  that  he  will  be  unable  to  resell  the  bills  to 
the  banks,  or  to  other  regular  buyers.  At  such  a 
season,  the  banks  are  most  unlikely  to  increase 
the  number  of  their  bills,  and  will  probably  not 
even  replace  those  that  fall  due  and  are  paid  off. 
They  will  have  a  considerable  stock  of  bills  in  their 
portfolios  bought  with  a  view  to  the  cash  demands 
at  the  end  of  the  half-year  and  maturing  within  this 
very  week ;  and  the  maturity  of  this  paper  will  be 
one  of  their  weapons  in  providing  the  cash  that  they 
will  require  for  their  customers  and  themselves. 

Since,  then,  the  bills  under  consideration  by  the 
bill-broker  will  not  be  easily  convertible  into  im- 
mediate cash,  he  is  faced  by  the  problem  of  having 
to  finance  them  himself.  And  from  what  has  been 
said  above  it  is  clear  that  during  the  next  few  days 
this  is  likely  to  be  an  expensive  matter. 

As  we  have  already  seen,  the  bill-brokers 
depend  largely  on  a  supply  of  credit  from  the  banks 


148  THE  MEANING  OF  MONEY 

for  financing  their  business,  and  our  friend  has, 
in  all  probability,  been  already  apprised  by  his 
bankers  and  other  providers  of  credit  that  they 
have,  at  the  present  moment,  other  uses  for  their 
funds.  For  the  advances  to  bill-brokers  have  been 
described  as  the  banks'  second  line  of  defence,  and 
when  they  wish  to  increase  their  first  line,  which 
is  their  cash  in  hand  and  at  the  Bank  of  England, 
or  to  maintain  it  when  it  is  diminished  by  their 
customers'  demand  for  currency,  they  at  once  do  so 
by  calling  in  these  loans  to  bill-brokers.  So  that 
far  from  expecting  to  be  able  to  obtain  the  where- 
withal, from  ordinary  sources,  for  financing  the 
parcel  that  is  offered,  the  bill-broker  in  question  is 
probably  already  severely  pinched  in  the  matter  of 
credit,  and  knows  that  if  he  takes  these  bills  he 
will  have  to  borrow  from  the  Bank  of  England  in 
order  to  pay  for  them.  And  borrowing  from  the 
Bank  of  England  is  an  expensive  operation,  since 
it  usually  charges,  for  advances,  i  per  cent  above 
its  official  discount  rate,  which,  again,  is  almost 
always  well  above  the  loan  rates  current  in  the 
outside  market. 

So  much  for  the  adverse  aspect  of  the  immediate 
conditions.  Against  them  we  have  to  set  the  keen- 
ness of  the  seller,  which  induces  him  to  offer  an 
exceptionally  fine  parcel  of  bills  at  a  rate  which  is 
tempting  to  the  buyer,  a  high  rate,  that  is  to  say, 
which  means  a  low  price  for  the  bills ;  also  the  fact 


THE  PROBLEM'S  VASTNESS  149 

that  as  most  buyers  of  bills  are  cramped  in  the 
matter  of  credit  by  the  seasonal  demands  already 
alluded  to,  and  so  are  not  in  a  position  to  compete 
eagerly  for  them,  the  present  moment  is  a  time  in 
which  the  bold  bargain-hunter,  prepared  to  face  the 
inconveniences  of  the  moment,  can  often  reap  fine 
profits  by  the  exercise  of  a  capacity  for  disregarding 
immediate  loss. 

The  forbidding  appearance  of  the  immediate 
conditions  thus  works  both  ways.  la  order  to  take 
the  bills  the  broker  knows  that  he  will  have  to 
borrow  from  the  Bank  of  England  for  at  least  a 
week,  and  that  the  higher  rate  paid  for  this  tem- 
porary accommodation  will  make  a  hole  in  the 
profit  that  he  hopes  tQjnake  on  the  bill  during  the 
course  of  its  currency ;  but  if  future  prospects  are 
inviting  he  will  be  willing  enough  to  do  this,  and 
it  is  the  future  prospect  that  will  sway  his  decision. 

And  now  the  vastness  of  the  problem  really 
begins  to  open  itself  out,  and  our  broker,  if  of  an 
imaginative  turn  of  mind,  may  well  fancy  himself 
like  a  doubtful  partisan,  standing  on  a  hill-top  and 
vainly  trying  to  peer  through  thick  mists,  with  the 
aid  of  a  somewhat  inefficient  spy-glass,  into  a  great 
plain  in  which  a  battle  is  being  waged  by  a  number 
of  forces  of  shifting  and  incalculable  strength,  and 
knowing  that  his  life  depends  on  throwing  in  his 
lot  with  the  winning  side. 

In  the  immediate  future  there  lies  the  probability 


ISO  THE  MEANING  OF  MONEY 

of  a  spell  of  cheap  money,  when  the  usual  reaction 
takes  place  after  the  satisfaction  of  the  temporary 
demands  at  the  end  of  the  half-year,  and  after  the 
distribution  of  the  dividends  on  Government  stocks 
early  in  July,  which  results  in  transferring  to  the 
hands  of  the  ordinary  banks  some  four  or  five  millions 
previously  held  by  the  Bank  of  England  on  behalf  of 
the  Government.  These  millions  then  become  avail- 
able at  the  market  rate  for  loans,  instead  of  at  Bank 
rate,  or  J  per  cent  above  it.  After  that,  according 
to  the  normal  tendency  of  the  year's  monetary  his- 
tory, the  demands  of  holiday-makers  and  harvesters 
at  home  ought  to  begin  to  tell ;  while  the  great 
demand  for  currency  all  over  the  world,  which 
generally  shows  itself  during  the  autumn,  when 
the  crops  of  the  chief  agricultural  countries  are 
being  gathered  and  garnered  and  shipped  to  the 
consumers'  markets,  ought  just  to  be  showing  its 
force  during  the  latter  period  of  the  currency  of  the 
bills  offered,  so  that  their  date  of  maturity  should 
be  happy,  enabling  the  holder  to  replace  them  on 
favourable  terms. 

According  to  the  normal  behaviour  of  monetary 
events,  the  buyer  of  a  bill  at  a  good  price  at  the 
end  of  June  ought  thus  to  be  able  to  reckon  on  a 
short  spell  of  ease  during  which  he  would  be  able 
to  finance  his  purchase  on  very  favourable  terms — 
perhaps  getting  his  money  at  2  per  cent,  against 
the  bill  which  we  suppose  him  to  have  bought  at 


UNCERTAIN  ELEMENTS  151 

4  per  cent.— andj^  gradually  .hardening  tendency, 
which  should  not,  however,  reduce  him  to  the 
necessity  of  giving  more  for  his  money  than  he 
was  earning  on  his  bill,  or  being  obliged  to  sell 
his  bill  at  a  loss,  owing  to  inability  to  provide  the 
wherewithal  to  carry  it. 

But  it  need  not  be  said  that  monetary  events 
do  not  habitually  move  along  the  lines  of  normal 
behaviour,  and  even  along  these  lines  a  little  swerve 
in  one  direction  or  another  may  suffice  to  upset 
calculations  that  have  to  be  reduced  to  the  fine 
terms  required  by  the  keen  competition  of  the  dis- 
count market  in  London.  The  slackening  of  general 
trade  may  greatly  reduce  the  demands  of  com- 
mercial customers  on  the  banks,  and  so  throw  a 
mass  of  credit  back  on  them  which  they  will  pour 
out  among  the  bill-brokers  at  nominal  rates;  a 
quickening  of  trade  may  have  an  equally  marked 
effect  in  the  other  direction  and  upset  all  expec- 
tations of  the  spell  of  easy  money  which  was  to 
have  made  the  holding  of  the  bills  a  profitable 
transaction.  A  cold,  wet  summer  will  check 
holiday  travel  and  expenditure,  while  a  brilliant 
season  "will  send  a  shower  of  currency  through 
tourists'  pockets  into  the  hands  of  hotel-keepers 
and  others  who  provide  for  their  wants ;  and  the 
extent  of  this  outward  tide  will  be  among  the 
innumerable  items  that  will  affect  the  volume  of 
what  is  called  money  in  Lombard  Street.  The 


152  THE  MEANING  OF  MONEY 

quality  and  date  of  the  harvest  is  another  matter 
that  affects  the  monetary  position,  and  in  calculating 
its  probabilities  the  weather  has  once  more  to  be 
allowed  for ;  for  if  at  the  harvest  season  something 
like  an  ideal  English  summer  is  reigning,  and 
farmers  think  that  they  can  rely  on  the  continuance 
of  favourable  skies,  they  will  proceed  leisurely 
and  gradually,  and  the  supply  of  currency  that 
they  will  require  will  be  so  much  the  less ;  but  if 
the  season  is  capricious,  and  a  burst  of  harvesting 
weather  arrives,  everybody  will  want  to  save  his 
crop  at  once,  and  each  farmer  will  be  pouring  all 
the  labour  that  he  can  get  on  to  his  fields  and 
wanting  money  for  wages,  and  for  all  the  other 
expenditure  that  moving  a  crop  entails. 

And  when  he  f  has  balanced,  as  well  as  he  can, 
the  chances  of  trade,  travel,  and  harvest  require- 
ments, the  bill-broker  must  not  forget  the  possible 
effects  of  an  equally  elusive  factor,  namely,  the 
demands  of  Government  finance;  these  do  not,  as 
a  rule,  count  heavily  at  the  period  during  which  the 
parcel  of  bills  offered  is  supposed  to  be  current ;  as 
we  shall  see  in  a  later  chapter,  it  is  in  the  January 
to  March  quarter,  when  the  income-tax  is  being 
gathered,  that  the  money  market  is  habitually 
pinched  by  the  transfer  of  cash  to  the  Government's 
balance  at  the  Bank  of  England ;  but  throughout 
the  year  it  is  always  possible  that  the  Treasury 
will  intervene  with  some  unexpected  demand  in  the 


THE  GOVERNMENTS  BALANCE   153 

shape  of  an  issue  of  Treasury  bills,  or,  on  the  other 
hand,  may  make  money  unexpectedly  plentiful  by 
allowing  its  balances  to  run  below  their  normal 
level.  For  owing  to  the  fact  that  the  Bank  of  Eng- 
land is  the  Government's  banker,  the  Government's 
money  is  in  its  hands,  and  consequently  when  the 
Government  holds  an  unusually  large  sum,  there  is 
so  much  locked  up,  and  not  available  in  the  outside 
market.  So  that  the  amount  of  the  Government 
balances  is  always  one  of  the  items  in  the  monetary 
problem,  and  the  difficulty  of  calculating  it  is 
increased  by  the  Olympian  aloofness  with  which 
the  Treasury  conducts  its  operations — far  away 
from  the  chaffering  and  huckstering  of  the  market 
which  it  often  affects  so  profoundly — and  also  by 
the  Oriental  mystery  in  which  the  movements  of 
Government  finance  are  shrouded. 

And  as  if  weather,  trade,  and  Government  finance 
were  not  sufficiently  incalculable  factors  in  the  pro- 
blem, there  arises  the  purely  psychological  question 
of  the  possible  extent  of  speculation  on  the  Stock 
Exchange.  We  have  seen  that  the  banks,  which 
supply  the  bill-broker  with  money,  employ  a  con- 
siderable amount  of  the  credit  that  they  make  and 
handle,  in  financing  the  requirements  of  those  who 
buy  stocks  and  shares  and  pay  for  them  with  bor- 
rowed money.  Consequently,  if  an  unusually  large 
number  of  people  come  to  the  conclusion  that  a  pur- 
chase of  securities  with  borrowed  money  is  likely 


154  THE  MEANING  OF  MONEY 

to  be  profitable,  the  supply  of  money  available  for 
the  bill-broker  may  be  curtailed.  And  the  reasons 
which  suddenly  impel  the  public  to  indulge  in  one 
of  its  periodical  outbursts  of  speculation  are, 
perhaps,  as  complicated  a  psychological  problem 
as  anybody  could  ever  be  asked  to  solve. 

And  yet  we  are  still  only  on  the  threshold  of  the 
bill-broker's  difficulty. 

For  all  these  things  happen,  or  do  not  happen,  at 
home  and  more  or  less  under  his  own  eye,  and  when 
he  proceeds,  as  he  must,  to  consider  the  possibility 
of  foreign  demands,  he  is  face  to  face  with  questions 
which  are  much  more  difficult  to  answer  and  much 
more  important  in  their  effects.  The  movement  of 
currency  into  the  country  for  harvesting  and  holiday 
purposes,  or  the  piling  up  of  the  Government's 
balance  at  the  Bank,  or  the  demands  arising  out  of 
an  unexpected  outburst  of  speculation,  may  cause 
inconvenience,  and  perhaps,  if  their  effects  are  par- 
ticularly unanimous  and  untoward,  make  a  serious 
difference  to  the  profit  on  a  bill:  but  a  sudden 
foreign  demand  and  a  considerable  export  of  gold 
might  easily  be  followed  by  a  complete  alteration  in 
the  whole  aspect  of  the  market— a  rise  in  Bank  rate 
and  a  readjustment,  for  the  time  being,  of  the  value 
of  credit  at  home  and  abroad. 

Having  devoted  so  much  space  to  the  considera- 
tion of  the  bill-broker's  problem,  and  having  dis- 
covered that  we  have  only  touched  the  surface  of 


ITEMS   IN  THE  PROBLEM  155 

it,  it  seems  wiser  on  the  whole  to  leave  him  with  his 
problem  and  our  sympathy.  For  any  attempt  to 
enter  in  detail  into  the  innumerable  causes  which 
affect  the  demand  for  money  abroad  would  lead  us 
into  a  discourse  of  most  formidable  area. 

But  it  may  be  mentioned  incidentally  that  the 
risks  of  foreign  politics  and  of  international  friction, 
the  mere  hint  of  which  is  often  sufficient  to  affect 
the  sentiment  of  the  money  market,  are  among  the 
items  in  the  enigma  which  has  to  be  solved,  or 
guessed  at,  by  our  bill-broker  before  he  arrives 
at  his  decision.  And  it  need  not  be  said  that  any 
serious  shock  to  credit  occurring  in  any  part  of  the 
commercially  civilized  world  might  easily  upset  all 
his  calculations. 

It  is  not,  of  course,  implied  that  all  these  matters 
are  actually  revolved  by  a  bill-broker  before  he 
makes  up  his  mind  about  any  of  the  numerous 
transactions  which  make  up  his  day's  business.  If 
this  were  so,  the  work  of  the  discount  market  would 
never  get  itself  done.  But  they,  and  many  more,  are 
the  data  on  which  he  has  to  work,  and  a  rough-and- 
ready  view  of  the  balance  of  all  these  possibilities 
and  hypotheses  has  to  be  at  the  back  of  his  head 
somewhere  in  his  sub-conscious  intelligence. 

The  essential  difference  between  him  and  the 
banker  lies  in  the  fact  thaFEnTBanEe7  makes  credit, 
while  the  broker  sells  credit,  relying  on  being  able 
to  buy  it  cheaper.  The  conditions  most  favourable 


156  THE  MEANING  OF  MONEY 

to  the  broker  are  a  high  discount  rate,  which  is  the 
price  of  the  credit  that  he  sells,  and  a  low  rate  for 
money,  or  short  loans,  which  are  the  credit  that  he 
buys.  The  broker  has  need  of  keen  and  sensitive 
alertness  as  opposed  to  the  level-headed  sagacity 
which  is  the  most  necessary  asset  of  the  banker. 
But  the  most  important  feature  in  the  position  of 
the  bill-broker  is  that  he  constitutes  the  second 
line  of  the  banker's  defence,  and  consequently  first 
feels  the  effect  of  any  monetary  pinch.  If  money  is 
wanted  suddenly  by  other  customers  whom  bankers 
think  fit  to  oblige,  or  if  it  is  thought  necessary  to 
restrict  the  supply  of  money,  the  advances  from 
bankers  to  bill-brokers  are  likely  to  be  straightway 
curtailed.  And  this  is  an  additional  reason  which 
makes  a  large  supply  of  alert  and  open-eyed  intel- 
ligence so  necessary  for  his  success. 


CHAPTER   IX 

THE  ACCEPTING  HOUSES  AND   FOREIGN   BANKS 

IT  ought  by  this  time  to  be  clear,  unless  the  propor- 
tion of  the  perspicuity  of  this  work  to  its  tediousness 
has  been  most  lamentably  inadequate,  that  what  we 
call  money  generally  means  credits  with  a  bank,  and 
that  most  of  these  are  created  either  out  of  loans 
made  by  the  bank  or  by  some  other  bank,  or  by  the 
discounting  of  a  bill,  which  is  only  a  special  form 
of  loan. 

Further,  the  bill  has  been  shown  to  have  advan- 
tages over  any  other  form  of  security,  because 
the  shortness  of  its  currency  ensures  a  speedy 
return  of  his  cash  to  the  holder,  and  because  it 
is  drawn,  or  ought  to  be,  against  actual  produce 
moving  into  consumption,  so  that,  as  is  claimed  by 
those  who  deal  in  it,  a  good  bill  of  exchange  pays 
itself. 

It  will  also  be  remembered  that  the  original  bill 
of  exchange  was  an  order  drawn  on  the  purchaser 
of  the  produce  by  the  seller,  instructing  him  to  pay 
its  price  to  himself  or  some  other  party  at  the  end 
of  a  period  during  which  the  purchaser  might  be 


158  THE  MEANING  OF  MONEY 

expected  to  have  disposed  of  the  produce,  either  in 
its  original  form  or  worked  up  for  consumption  by 
some  process  of  manufacture.  And  the  purchaser 
of  the  goods  accepted  the  bill  by  signing  his  name 
across  it — that  is,  acknowledged  that  he  would  be 
liable  for  the  sum  named  at  the  due  date,  and  so 
became  the  acceptor  of  the  bill.  After  which  the 
bill,  drawn  by  a  good  name  and  accepted  by  a  good 
name,  and  with  the  necessary  documents  in  order 
showing  that  goods  had  been  duly  shipped  and  in- 
sured, was  as  sound  and  attractive  a  security  as 
the  most  sceptical  money-lender  could  require,  and 
could  readily  be  discounted  and  advanced  against. 

It  is  necessary  to  pick  up  these  threads  which  we 
left  flying  loose  when  we  turned  from  the  considera- 
tion of  the  forms  of  money  to  that  of  the  principal 
wheels  in  the  machine  which  produces  money.  Of 
these  we  have  found  that  the  banks  are  the  chief, 
since  they  provide  the  right  to  draw  cheques,  which 
are  the  currency  of  English  commerce,  and  give 
credits  against  indebtedness,  which  is  called  into 
being  by  the  fact  that  trade  habitually  lives  on  the 
profits  which  it  is  in  process  of  realizing,  and  could 
not  proceed  with  its  present  unceasing  velocity  if  it 
had  to  wait  for  their  realization  before  it  went  on  to 
its  next  task.  Next  we  examined  the  operations 
and  responsibilities  of  the  bill  brokers,  the  retail 
dealers  in  bills,  who  are,  as  it  were,  an  offshoot  of 
the  banks  specializing  on  the  selection  of  bills  to  suit 


THE  BILL  AND  THE  ACCEPTOR      159 

the  requirements  of  the  bankers  as  to  date,  etc., 
and  keeping  them  in  stock  with  the  assistance  of 
credits  chiefly  furnished  by  the  banks.  It  is  now 
necessary  to  consider  the  functions  of  those  who 
manufacture  the  bills,  against  which  the  banks 
and  discount  houses  jointly  or  severally  provide 
credits. 

In  describing  the  bill  of  exchange  in  Chapter  IV. 
we  took  the  simplest  possible  case  in  order  to  keep 
the  ground  as  clear  as  might  be  of  confusing  obstruc- 
tions, and  imagined  an  American  farmer,  Mr.  Silas 
P.  Watt,  selling  wheat  to  a  London  merchant,  Mr. 
John  Smith,  and  drawing  a  bill  on  him  for  the  value 
of  the  produce.  By  so  doing  we  not  only  attained 
a  measure  of  clearness  which  would  otherwise  have 
been  impossible,  but  also  got  down  to  the  ultimate 
facts  of  the  case.  For  the  real  manufacturers  of 
real  produce  bills  are  still  the  grower  of  the  produce 
and  the  merchant  who  handles  it  in  its  ultimate 
market.  Without  them  the  produce  could  not  come 
into  existence,  and  without  produce  there  could  be 
no  bills,  except  of  the  kite-flying  order,  as  drawn 
by  Mr.  Micawber  on  Mrs.  Micawber. 

Nevertheless,  modern  processes  of  specialization 
have  introduced  certain  intermediaries  between  the 
producer  and  the  merchant  in  the  ultimate  market. 
As  jnaUexs_jTe_a.rranged  now  Mr.  Watt  would  sell 
his  wheat  to  a  merchant  in  his  own  country,  and  it 
would  probably  pass  through  many  hands  on  paper 


I6o  THE  MEANING  OF  MONEY 

before  it  was  finally  shipped.    It  would  be  financed 
In  the  mean  tinf  by  aflraorftjg  f™™^ 


and  the  bill  drawn  against  it,  when  finally  shipped, 
an  Americaii>anir  r>r 


house  on  its  correspondents  in  London,  who 
would  be  a  firm  devoting  much  if  not  most  of  its 
time  aricl  attention  to  this  specialized  industry  of 
acceptance7~ 

Since  this  inquiry  is  confined  to  the  machinery 
of  money  in  London,  we  can  leave  out  the  producer 
and  the  American  merchant  and  their  bankers  and 
confine  ourselves  to  the  London  end  of  the  bill, 
that  is,  the  London  name  which  is  written  across  it, 
and  so  marks  it  as  accepted. 

It  is  easy  to  understand  how  a  distinct  class  of 
accepting  houses  grew  up  out  of  the  merchant  im- 
porters who  originally  accepted  bills  in  the  course 
of  their  importing  business,  that  is,  accepted  orders 
on  themselves  to  pay  for  goods  which  were  in  pro- 
cess of  being  forwarded  to  them.  The  readiness 
with  which  the  acceptances  of  the  different  merchants 
would  be  discounted  and  turned  into  cash  would 
vary  considerably  with  the  difference  in  their  repu- 
tation and  standing,  and  the  caution  with  which 
they  were  credited  in  the  matter  of  conducting 
their  business.  And  the  varying  readiness  with 
which  certain  acceptances  were  discounted  would 
inevitably  express  itself  in  varying  rates  at  which 
their  bills  could  be  placed.  It  would  thus  naturally 


ORIGIN  AND  GROWTH  161 


follow  thatitwojnld  profo  mftrrihflflts  °^  Secon'rate 
standingto^ive  a  commi^'op  tn 


tatinn  was  more  f^afced  in  order  to  secure  a  more 
attractive  signature  than  their  own,  and  so  get  back 
trie  Commission  and  q  ]jf-flWmnrrhy  h^jppr  able  to 
ffltencetEeir  operations  more  cheaply  than,  ,by  means 

of  their'own'acceptarice. 

The  merchants  of  first-class  credit  would  thus 
find  that  they  could  let  out  the  use  of  their  reputa- 
tions on  profitable  terms,  and  proceed  to  specialize  in 
this  branch  of  business,  which  consisted  in  examining 
the  bills  put  before  them  for  acceptance,  keeping 
themselves  well  acquainted  with  the  means  and 
standing  of  the  drawers  of  them,  and  giving  their 
acceptance,  for  a  commission,  to  such  paper  as 
fulfilled  the  requirements  _of  jtheir  discrimination. 

The  foreign  connections  arising  out  of  the 
original  trading  operations,  with  which  they  laid 
the  first  foundations  of  their  mercantile  position, 
naturally  led  these  houses  into  providing  monetary 
accommodation  for  the  governments  of  the  countries 
with  which  they  traded,  and  there  thus  grew  up  out 
of  the  ranks  of  successful  City  merchants  a  class  of 
merchant  bankers,  financiers  and  accepting  houses, 
which,  along  with  the  old  private  banking  houses, 
constituted  a  sort  of  aristocracy  in  the  City,  which 
still  survives  to  some  extent.  They,  are  often 
descrifre^  as  merchant  bankers,  but  it  is  important 
to  remember  that  they  "are  not  bankers  in  the  strict 


162  THE  MEANING  OF  MONEY 


of  tfre  term  —  that  i^  th«»v 

across  the  counter  against  cheques  drawn  on  them  — 
because  it  is  from  their  ranks  that  the  directors  of 
the  Bank  of  England  are  chiefly  recruited,  and  as 
we  shall  see  in  a  later  chapter,  a  director  of  the 
Bank  of  England  must  not  be  a  banker. 

The  importance  of  the  function  of  the  accepting 
house  need  not  be  emphasized.  If  the  producer  of 
the.^^q^cej^sjhe^jginal  creator  ot  the  ..bill,  it  is~ 
the  acceptor  who,  by  his  signature,  gives  it  currency 
and  hall-marks  it  for  the  purposes  of  the  London 
market.  A  banker  or  broker  who  discounts  a  bill 
and  parts  with  cash  or  credit  in  exchange  for  it, 
cannot  be  expected  always  to  know  the  position  and 
trustworthiness  of  the  drawer,  and  must  often  rely 
on  the  name  of  the  acceptor  as  his  sole  guide  in 
appraising  its  merit.  So  that  it  is  by  the  judicious 
and  properly  regulated  use  of  their  names  that 
the  accepting  houses  put  into  circulation  an  enor- 
mous mass  of  credit  instruments,  the  supreme 
merits  of  which  as  liquid  investments  have  already 
been  insisted  on  with  "  damnable  iteration." 

Nevertheless,  the  office  of  the  accepting  houses 
is  still  dependent  on  that  of  the  banks,  because 
the  bills  that  they  accept,  though  thereby  greatly 
furthered  in  their  progress  towards  becoming  cash, 
do  not  Actually  become  **a«fr  untfl  ^y  fo>vS 


discounted    And  thisis  done  either  by  a  banker  or 
by  a  bill-broker,  who  works  with  credit,  generally 


DEPENDENCE  ON  THE  BANKS        163 

furnished  to  him  by  a  banker.  A  bill  that  cannot 
be  discounted  is  of  no  use  to  the  holder  until  its 
day  of  maturity,  and  is  not  until  then  a  credit  instru- 
ment in  any  sense.  And  we  thus  come  back  once 
more  to  the  supreme  importance  of  the  banks  in 
London's  monetary  polity. 

For  the  power  of  the  accepting  houses  to  give 
currency,  by  their  acceptance,  to  paper  concerning 
the  merits  of  which  they  are  best  in  a  position  to 
discriminate,  is  one  that  is  obviously  liable  to 
dangerous  abuse,  and  in  their  case  the  rherl^  nf 
publicity  is  absent,  since  the  private  nature  of  their 
business  Keeps  it  tree  even  from  the  ceremony  of  a 
half-yearly  published  balance-sheet.  A  very,  little 
carelessness,  a  very  little  error  on  the  side  of 
optimism,  and  a  very  little  neglect  of  the  principle 
that  the  basis  of  a  real  bill  should  be  real  produce 
moving  into  consumption,  and  there  atrfr  all  th» 
materials  for  a  dangerous  inflation  of  credit.  And 
the  names,  widen  ultimately  provide  the  means  by 
which  acceptances  are  turned  into  cash  or  credit, 
have  thus  an  important  responsibility  thrown  upon 
them,  and  one  which  is  not  apparent  to  the  general 
public,  to  which  the  whole  machinery  of  acceptance 
is  more  or  less  a  mystery. 

The  question  is  complicated  by  the  fact  that,  as 
has  already  been  mentioned,  the  banks  have  them- 
selves undertaken  the  business  of  acceptance  to  an 
extent  that  has  increased  rapidly  in  recent  years. 


164  THE  MEANING  OF  MONEY 

The  excellent  sanity  with  which  the  banks  conduct 
their  business  makes  this  complication  more  ap- 
parent than  real ;  and  the  dependence  of  the  accept- 
ing houses  on  the  good  opinion  of  the  cheque-paying 
banks  concerning  their  paper  is  modified  by  the 
fact  that  they  can  ultimately  have  recourse  to  the 
Bank  of  England,  through  a  bill  broker.  The  Bank 
of  England  requires  two  British  names,  of  which 
one_jmust~b7^t}le~-act:eptorrsj  on  bills  that  it  _dis- 
counts,  and  a  bill  accepted  by  a  British  firm  and 
endojsejsLbjLaJLpndon  bill-broker  fulfils  its  require- 
nienlsu  Andthe_S^nk  of  England  has  before  now 
intervened  with  effect  when  the  paper  of  an  accept- 
ing house  has  been  unreasonably  considered  too 
plentiful  by  the  other  banks. 

Nevertheless,  the  opinion  of  the  banks  concern- 
ing the  paper  of  an  accepting  house  is  very  impor- 
tant to  it ;  and  the  position  is  curious  which  makes 
the  banks  at  once  the  watch-dogs  over  the  volume 
of  acceptance,  and  large,  increasingly  large,  accep- 
tors themselves.  It  is  possible  that,  in  the  early 
days  of  their  experience  in  this  line  of  business,  the 
banks  gave  their  acceptance  too  cheaply,  and  it  is 
natural  that  the  accepting  houses  should  regard 
their  intrusion  into  it  with  an  unfavourable  eye. 
It  is  also  very  essential  that  the  banks  should  re- 
member that  the  least  irregularity  or  carelessness 
on  their  part  in  the  selection  of  the  paper  that  they 
hall-mark  with  their  acceptance  might  have  very 


THE  BANKS  AS  ACCEPTORS          165 

far-reaching  effects,  if  it  came  to  light  and  were  the 
subject  of  City  comment,  because  the  general  body 
of  their  customers  and  depositors  would  be  ex- 
tremely likely  to  misunderstand  it;  and  jjiat  what 
would  be  a  mere  indiscretion  in  an  accepting  house, 
wh'icQoes  not  defend  for  US  existence  on  the  con- 
fideqpe  of  the  nninstrqcted  multitude,  might  Mean 
disaster  to  a  bank,  which  does. 

At  the  same  time,  if  watched  over  with  due  care, 
the  growing  interest  of  the  banks  in  acceptance 
business  seems  to  be  a  perfectly  natural  process 
arising  out  of  the  increasing  requirements  of  the 
expanding  trade  of  the  world.  It  is  difficult  for  the 
ranks  of  the  old  accepting  houses  to  be  recruited  ; 
it  has  lately  been  done  with  success,  but  a  firm  that 
enters  on  the  business  has  to  have  capital  and  credit 
at  its  command,  such  as  are  rarely  to  be  found  in 
the  hands  of  folk  who  are  prepared  to  risk  them  in 
a  new  enterprise,  the  technicalities  of  which  have 
to  be  acquired  with  patience,  and  perhaps  through 
costly  experience.  The  extent  to  which  the  old 
houses  can  accept  is  restricted  by  the  obvious  limits 
which  are  imposed  on  the  amount  of  business,  espe- 
cially of  business  in  credit,  that  can  be  done  by  any 
one  firm.  And  the  reputation  and  position  of  the 
banks  seem  to  qualify  them  naturally  to  fill  the 
gap. 

An  important  part  of  the  machinery  of  accept- 
ance is  also  furnished  by  the  Indian  and  Colonial 


166  THE  MEANING  OF  MONEY 

banks,  which,  naturally  again,  give  a  large  part 
of  their  attention  to  providing  exchange  between 
London  and  the  country  with  which  they  are  con- 
nected, and  to  handling  the  paper  which  its  trade 
calls  into  being.  The  high  reputation  of  the  Indian 
banks,  and  the  skill  with  which  the  bills  endorsed 
by  them  are  marketed,  makes  the  prices  fetched  by 
their  bills  often  a  leading  factor  in  the  quotations 
of  the  discount  market. 

Finally,  in  considering  the  main  springs  which 
feed  the  flood  of  acceptance,  we  come  to  the  London 
agencies  of  the  chief  Continental  banks,  which  play 
a.yerv  important  part  bofo  as  sellers  .and  -buyese  of 
bills._  Foreign  financiers  were  quick  to  detect  the 
advantages  of  the  English  credit  system,  and  to  turn 
them  to  their  own  profit  and  to  the  furtherance  of 
the  trade  of  the  countries  that  they  represent.  It 
is__often  contended  that  the  rapid  expansion  of 
German  trade,  which  pushed  itself  largely  by. its 
elasticity  and  adaptability  to  the  wishes  ofjtscus- 
tomers,  could  never  have  been  achieved  if  it  had 
not  been  assisted  by  cheap  credit  furnished  in 
London,  by  means  of  which  German  merchants 
ousted  English  manufactures  with  offers  of  long 
credit  facilities  to  their  foreign  customers. 

An  instructive  example  of  this  system  of  pushing 
business  on  credit,  and  of  its  disastrous  results  to 
all  parties  when  carried  too  far,  was  lately  furnished 
by  the  embarrassments  of  German  traders  with 


GERMAN  USE  OF  CREDIT  167 

Japan.  A  letter  from  the  Tokio  correspondent  of 
the  Economist,  dated  May  8,  and  published  on  May 
30,  1908,  dealt  with  the  financial  and  commercial 
strain  and  depression  then  ruling  in  Japan,  and  its 
adverse  effect  on  foreign  (non-Japanese)  merchants, 
and  proceeded,  in  the  following  passage  :  — 

"  Almost  all  the  foreign  firms  thus  far  affected  are  German, 
and  the  reason  is  not  far  to  seek.  Years  ago,  the  Japanese 
import  trade  was  chiefly  carried  on  upon  a  cash  basis.  A 
Japanese  merchant  gave  an  order  for  goods,  against  which  he 
deposited  bargain  money,  and  when  the  merchandise  arrived 
he  took  delivery  only  after  paying  the  balance.  The  German 
merchants,  however,  gradually  introduced  a  credit  system. 
First  the  goods  were  permitted  to  be  taken  away,  and  payment 
deferred  until  they  reached  the  go-downs  of  the  Japanese  pur- 
chaser, this  concession  being  made  on  the  quite  reasonable 
plea  that,  as  soon  as  the  latter  had  the  goods  in  his  possession, 
he  would  be  able  to  get  advances  on  them  from  the  native 
banks,  and  liquidate  his  account.  But  the  time  limit  was 
gradually  extended  •  •  .  until  delivery  nag  permitted  to  be 

for  as  lotlft  as  from  thi™  f^  *\* 


months.  Though  the  British  merchants  stood  out  against  the 
practice  as  long  as  possible,  they  were  compelled  to  follow 
suit  to  some  extent  ;  but,  holding  that  such  an  extension  of 
credit  was  dangerous  in  Japan,  they  never  went  so  far  as  their 
German  competitors.  So  long  as  things  went  well  in  this 
country  the  credit  system  worked  satisfactorily,  and  during  the 
boom  after  the  war,  there  can  be  no  doubt  that  the  business 
handled  by  the  Germans  went  ahead  more  rapidly  than  that  in 
the  hands  of  British  merchants,  who  preferred  to  work  on  the 


168  THE  MEANING  OF  MONEY 

old  conservative  lines.  As  sonn^hnw^vgr^^s^a  pfirind  Jif 
stringency  in  money  and  contraction  in  trade  took  place, 
difficulties  began  to  arise  .  .  .  Very  heavy  losses  have  been 
suffered.  It  is  not  too  much  to  say  that  in  the  last  six  months 
the  German  merchants  have  lost  far  more  than  they  gained 
during  the  two  years  of  the  boom  by  the  extension  of  the 
credit  system.  Once  more  it  has  been  shown  that  unsound 
methods  of  doing  business,  whatever  advantage  they  may  bring 
for  the  moment,  are  disastrous  in  the  long  run." 

This  instructive  message  is  an  example  of  much 
that  has  been  happening  in  many  other  countries 
besides  Japan,  Morocco  having  been  another  field  in 
which  seed  of  this  sort  is  believed  to  have  been 
plentifully  sown.  No  one  can  quarrel  with  the 
Germans  for  making  use  of  the  credit  weapon  in 
extending  their  trade,  though  their  over-extension 
of  credit  facilities  has  had  results  which  fall  on 
others  besides  themselves;  still  less  can  they  be 
blamed  for  their  cleverness  in  taking  full  advantage 
of  London's  monetary  machinery,  and  providing 
themselves  in  London  with  the  credit  with  which 
they  wheedled  away  England's  customers  in 
countries  where  credit  facilities  were  an  attrac- 
tive novelty,  over-indulgence  in  which  has  since 
proved  unwholesome  both  for  the  giver  and  the 
taker. 

It  is  very  probable  that  the  extent  to  which  they 
did  so  is  much  exaggerated,  since  in  a  case  of  this 
kind,  in  which  figures  are  necessarily  not  available, 


FOREIGN  USE  OF  CREDIT  169 


an  active  imagination  roams  at  large,  ^it  **  lg  at 
least  interesting  to  note  that  England,  having,  flope 

so  much  to  establish  the  foundations  of  German 
military  and  political  greatness  at  the  time  of 
Frederick  the  Great,  when  it  subsidized  the  young 
kingdom  of  Prussia  at  a  critical  period  in  its  Titanic 
struggle,*  has  also  given  a  helping  hand  to  German 
trade_with  the  facilities  so  cheaply  offered  by  the 
London  C 


Let  us  hope  that  our  German  friends  are  duly 
grateful,  and  let  us  avoid  the  mistake  of  imagining 
that  we  have  done  ourselves  any  permanent  harm 
by  this  assistance.  It  is  to  the  economic  interest  of 
humanity  at  large  that  production  should  be  stimu- 
lated, and  the  economic  interest  of  humanity  at 
large  is  the  interest  of  England  with  its  mighty 
world-wide  trade,  nprmany  jffly  quickened  pro- 
duction  with  the  help  of  English  credit,  and  so,  it 
may  be  remarked.,. has  every  economically  civilized 
country  in  the  world.  The  fact  that  all  or  most  of 
them,  including  our  own  colonies,  develop  their 
resources  with  the  help  of  English  capital  and  credit, 
and  then  do  their  utmost  to  keep  out  our  products 
by  means  of  tariffs,  makes  it  appear  to  superficial 

nhc^prvprfi    that    England    pr^dfifi   MPl'taLJ™!.**1'' 

destruction  of  its  own  business.     But,  in  practice, 

the  system  works  quite  otherwise.     For  all  these 

countries  that  develop  their  resources  with  our 

*  Carlyle,  "  Frederick  the  Great,"  book  xviii.  chapter  1 1. 


i;o  THE  MEANING  OF  MONEY 

money,  aim  at  developing  an  export  trade  and 
selling  goods  to  us,  and  as  they  have  not  yet  reached 
the  point  of  economic  altruism  at  which  they  are 
prepared  to  sell  goods  for  nothing,  the  increase  in 
their  production  means  an  increasing  demand  for 
our  commodities  and  services.  And  in  the  mean 
time  the  interest  on  our  capital  and  credit,  and  the 
profits  on  working  the  machinery  of  exchange,  are 
a  comfortable  addition  to  our  national  income. 

This  digression  is  not  quite  as  irrelevant  as  it 
seems,  for  there  is  a  strong  feeling  among  the  manu- 
facturing classes  that  the  facilities  given  by  the 
London  money  market  to  foreign  borrowers  are 
detrimental  to  English  trade.  This  contention 
cannot  be  set  aside  as  lightly  as  it  sometimes  is  by 
the  defenders  of  our  banking  system.  The  obvious 
answer  to  it  is  that  England  makes  profits  out  of 
its  credit  factory  which  very  much  more  than  com- 
pensate it  for  any  handicap  imposed  on  its  manu- 
factures of  other  commodities.  But  it  must  be 
admitted  that  this  is  only  a  partial  answer,  and  that 
if  the  handicap  were  real  and  persistent,  its  working 
would  tend  to  make  England  a  banking,  discounting 
and  exchange-dealing  nation  rather  than  a  manu- 
facturing nation ;  in  other  words,  it  would  tend  to 
turn  our  energies  into  financing,  calculating,  and 
book-keeping,  rather  than  producing  and  working 
on  commodities.  This  process  would  not  neces- 
sarily be  an  evil,  but  is  a  matter  which  might 


ENGLISH  TRADE  AND  BANKING       171 

have  important  economic  and  social  results,  and 
ought  not  to  be  ignored  if  it  were  really  at  work. 
The  organization  of  foreign  banking  which  places 
credit  facilities,  borrowed  in  London,  at  the  dis- 
posal of  foreign  manufacturers,  is  a  matter  which 
calls  for  respectful  imitation  in  England  There 
ought  to  be  no  possible  ground  for  the  assertion, 
which  is  sometimes  heard,  that  English  traders 
cannot  borrow  in  their  own  market  as  cheaply  as 
foreigners.  A  remedy  for  this  evil,  if  it  really  exists, 
wodlfl  Be  merely  a^matter  of  organization  and  co- 
operation between  our  mercantile  and  banking 
communities,  and  its  further  discussion  is  obviously 
out  of  place  in  a  merely  explanatory  work. 

This  excursion  into  complicated  questions  of  in- 
ternational trade  was  necessitated  by  the  appearance 
of  the  agencies  of  foreign  banks  as  an  important  item 
among  the  institutions  whose  acceptances  give  cur- 
rency to  bills  of  exchange  and  enable  them  to  be 
discounted  or  sold  for  cash.  They  also  at  times 
have  an  important  influence  on  discount  rates  by 
dealing  on  the  other  side  of  the  market  and  buying 
English  bills.  And  ho_th  these  operations,  whether 
they  raise  credits  on  this  side  by  selling  their  own 

r  obtain  a  credit  HIIP  at  a 


and  holding  English  bills,  givethem  a  hold  on 
London's  gold.  In  fact,  their  holding  01  tngllsh 
bills  is  arranged  wSn^  tms  direcT  ubjucl.  Some 


Continental  institutions  always    keep   a   portfolio 


i;2  THE  MEANING  OF  MONEY 

stocked  with  bills  on  London,  constantly  replaced 
as  they  mature,  so  that  in  time  of  need  they  may 
take  gold  from  London  to  replenish  the  basis  of 
their  note  issues.  And  this  fact  is  one  that  obviously 
has  to  be  continually  remembered  and  allowed  for 
by  the  directors  of  the  Bank  of  England,  which  has 
London's  store  of  gold  in  its  keeping.  And  more- 
over, the  dealings  of  foreign  houses  in  bills  of 
exchange  have  an  important  effect  on  the  foreign 
exchanges,  and  bring  us  face  to  face  with  the  neces- 
sity for  an  explanation  of  that  formidable  subject 


CHAPTER  X 

THE  FOREIGN  EXCHANGES 

THE  foreign  exchanges  are  really  a  fairly  simple 
matter  if  we  keep  them  free,  as  far  as  possible,  from 
the  technicalities  which  are  the  delight  of  experts  in 
the  subject,  who  generally  expound  it.  They  were 
exemplified  in  Chapter  I.  by  the  purchase  of  a  postal 
order,  and  they  may  be  described  as  the  mechanism 
by  which  money  here  is  exchanged  for  money  some- 
where else.  In  the  example  there  given  the  business 
was  simplified  by  the  existence  of  the  machinery  of 
the  Post  Office,  which  is  prepared  to  undertake 
exchange  transactions  at  fixed  rates. 

In  the  exchanges  of  the  large  amounts  which 
international  commerce  makes  payable  in  one  place 
or  another,  the  bill  of  exchange  plays  an  important 
part.  But  the  essential  point  to  be  grasped  is  the 
fact  that  fluctuations  in  rates  of  exchange  are  caused 
by  variations  in  the  relative  value  in  the  currencies 
of  the  two  centres  between  which  the  exchange  is 
quoted.  If  a  large  number  of  Londoners  have  pay- 
ments to  make  in  Paris,  or  want  to  send  money 
to  Paris,  a  large  number  of  people  will  want  to 


174  THE  MEANING  OF  MONEY 

exchange  sovereigns  for  francs,  and  the  value  of  the 
sovereign  will  be  depreciated  when  expressed  in 
francs,  and  the  Paris  exchange  will  move  "  against 
London."  The  most  obvious  reasons  which  will 
cause  this  variation,  or  stimulate  this  demand  in 
London  for  remittances  to  Paris,  will  be  the  balance 
of  trade  in  its  widest  sense — the  exchange  of  com- 
modities and  all  kinds  of  services  between  England 
and  France — and  the  rate  of  interest  ruling  in  the 
two  centres.  If  Paris  sells  more  goods  and  services 
to. London,  more  people  in  London  will  have  pay- 
ments to  make  in  Paris ;  and  if  the  rate  of  interest 
be  3  per  cent,  in  Paris  and  2  per  cent,  in  London, 
money  will  tend  to  flow  from  London  to  Paris  to 
earn  the  higher  rate,  and  the  demand  for  remit- 
tances to  Paris  will  thus  be  further  stimulated. 

Since  bills  of  exchange  play  an  important  part 
in  this  business  of  the  exchanges,  it  is  perhaps  safer 
to  repeat  here  that  a  bill  of  exchange  is  an  order 
by  A  directing  B  to  pay  a  sum  of  money  to  himself, 
A,  or  to  a  third  party ;  that  the  cheque  with  which 
you  tell  your  bank  to  pay  £2  to  your  butcher  is, 
in  fact,  a  bill  of  exchange ;  but  that  the  term,  in  its 
more  usual  meaning,  implies  an  order  on  a  person 
at  some  distance  in  space  to  pay  a  sum  at  some 
distance  in  time.  As,  for  example,  when  a  dairy 
farmer  in  New  South  Wales  sells  butter  to  a  pro- 
duce merchant  in  London,  and  draws  a  bill  on  him 
at  sixty  days'  sight.  When  the  bill  is  "  accepted  "— 


ONE  BILL  PAYS  TWO   DEBTS         175 

that  is,  when  the  merchant  acknowledges  his  liability 
to  pay  by  writing  his  signature  across  the  bill— it 
becomes  a  negotiable  instrument  and  can  be  dis- 
counted and  turned  into  cash. 

It  can  also,  evidently,  be  used  wherewith  to  pay 
any  debts  that  the  farmer  may  have  to  meet  in  London. 
If  he  owes  a  similar  sum  to  his  harness  dealer,  he  can 
hand  the  bill  over  to  him  and  let  him  collect  the 
money  from  the  merchant ;  and  the  one  bill  will  thus 
have  paid  two  debts.  It  has  paid  the  farmer  on 
behalf  of  the  produce  merchant,  and  the  harness 
dealer  on  behalf  of  the  farmer.  Or  if  the  farmer  owes 
money  in  other  parts  of  the  world,  a  bill  on  London 
is  always  acceptable ;  if  he  has  bought  hay-making 
machinery  in  America,  the  draft  on  his  merchant 
could  be  used  equally  well  to  pay  for  it,  for  there 
would  be  plenty  of  people  in  the  United  States  who 
have  payments  to  make  in  London  and  will  give  a 
certain  number  of  American  dollars  to  the  manu- 
facturer of  mechanical  hay-makers  for  his  order  on 
the  London  merchant. 

And  here  comes  in  the  difficulty  which  makes 
the  foreign  exchanges  apparently  so  obscure. 
When  it  was  a  matter  of  a  payment  between 
London  and  Sydney,  there  was  no  question  of  a 
difference  of  currency,  for  in  both  these  places  the 
sovereign  is  the  unit  in  which  payments  are  ex- 
pressed. But  when  a  draft  on  London  has  to  be 
sold  in  America,  the  relative  value  of  the  sovereign 


176  THE  MEANING  OF  MONEY 

and  the  dollar  comes  into  the  calculation.  And 
the  unfamiliar  observer  is  puzzled  by  the  fact  that 
these  relative  values  continually  .fluctuate,. ..with 
the  result  that  the  table  of  exchange  quotations 
constantly  varies,  and  the  exchanges  are  said  to 
move  in  favour  of  or  against  a  particular,  .country 
in  a  manner  which  is  very  extraordinary  to  him, 
since  the  intrinsic  value  of  the  currencies  that  they 
represent  is  unaltered. 

We  shall  arrive  at  a  clearer  understanding  of 
the  matter  if  we  leave  out  for  the  present  this 
question  of  exchange  of  different  currencies  and 
return  to  that  of  the  exchange  between  London  and 
Sydney.  These  two  towns  use  the  same  coin  of 
the  same  fineness  as  legal  tender  and  as  money  of 
account,  and  therefore  it  might  be  supposed  that 
any  one  who  has  to  make  a  payment  of  £20  in 
Sydney  would  have  to  put  down  in  London 
exactly  £20  plus  a  payment  to  the  colonial  banker 
who  sells  him  the  draft  for  his  trouble  and  expense 
in  sending  the  money. 

But  this  is  not  so.  Owing  to  the  fact  that 
Australia  constantly  has  to  remit  to  England  in 
order  to  meet  interest  on  debt,  etc.,  the  Australian 
exchange  is  normally  in  favour  of  England  ;_tliaJt  is 
to  say,  a  credit  on  London  is  more  sought  after  in 
Sydney  than  a  credit  on  Sydney  is  sought  after  in 
London,  because  the  drain  of  money  is  habitually 
from  Sydney  to  London. 


LONDON  AND  SYDNEY  177 

Hence,  if  you  go  to  an  Australian  bank's 
London  office  and-lnijLa^irafLoiL.Sydney  with  your 
cheque  on  the  Westminster  Bank,  you  are  giving 
it  money  in  London  in  exchange  for  money  in 
Sydney,  and  we  have  seen  that  money  in  London 
is  relatively  more  valuable  than  money  in  Sydney 
owing  to  the  exchange  being  normally  in  favour  of 
London. 

Consequently,  the  Australian  bank  is  prepared 
not  indeed  to  give  you  an  order  for  £20  and  some- 
thing over  in  Sydney  in  return  for  your  London 
cheque  for  £20,  but  to  do  what  comes  to  the  same 
thing,  namely,  manage  your  remittance  for  .you  for 
nothing,  making  no  charge  for  its  trouble. 

But  if  the  movementwere  reversed,  and  some  one 
in  Sydney  were  buying  a  draft  on  London,  he  would 
have  to  pay  £20  plus  a  premium,  because  the^x- 
change  is  in  favour  of  London ;  that  is,  a  sovereign  in 
London  normally  commands  more  than  a  sovereign 
when  compared  with  a  sovereign  in  Sydney. 

Here,  then,  we  have  an  example  of  the  working 
of  the  laws  of  exchange  between  two  countries  in 
which  the  coins  into  which  drafts  are  convertible 
are  identical,  and  if  once  we  can  grasp  the  logic  of 
this,  we  have  gene  a  long  way  towards  simplifying 
the  more  complicated  question  of  the  exchanges 
between  countries  with  different  currencies. 

For  the  broad  principle  is  the  same  everywhere. 
Whenever,  for  any  reason,  one  place,  A,  has  to 

N 


i;8  THE  MEANING  OF  MONEY 

send  more  money  to  another  place,  B,  than  B  has 
to  send  to  it,  B's  currency  will  be  relatively  more 
valuable,  and  the  exchange  will  be  in  favour  of  B. 

Let  us  consider  the  matter  again  in  the  case  of 
Sydney  and  London  and  suppose  that  instead  of 
going  to  one  bank  to  arrange  your  remittance  you 
went  into  a  regular  market  wherein  were  assembled 
representatives  of  many  Australian  banks  and 
exchange  dealers,  and  waving  your  cheque  on  the 
Westminster  before  them  asked  them  how  much 
money  in  Sydney  they  would  give  for  it.  If  the 
pressure  to  remit  money  from  Sydney  to  London 
were  keen,  they  would  all  be  eager  to  have  your 
London  cheque,  because  by  buying  it  in  exchange 
for  a  draft  on  their  Sydney  balance  they  would  be 
increasing  their  London  credit  at  the  expense  of 
/their  Sydney  credit  without  incurring  the  cost  and 
{risk  of  sending  coin  or  bullion  from  Australia. 

Consequently  competition  would  impel  them  to 
give  you  something  more  than  £20  in  Sydney,  but 
that  something  more  would  be  limited  by  the 
expense  of  sending  coin  and  bullion.  If  we  sup- 
pose, for  the  sake  of  simplicity,  that  expense  to  be 
covered  by  6d.  per  pound,  it  would  pay  them  if 
the  demand  were  eager  enough  to  give  £20  los.  for 
your  London  cheque.  Beyond  that  it  would  not 
pay  them  to  go.  If  you  tried  to  insist  on  £20  los.  id., 
it  would  be  cheaper  for  them  to  send  coin  from 
Australia.  So  that  in  this  case  £20  los.  (or 


LONDON  AND   SYDNEY  179 

£i  as.  6d.  per  pound)  would  represent  what  is 
called  gold  point,  and  if  your  London  cheque  really 
fetched  that  price,  the  exchange  between  London 
and  Sydney  would  be  said  to  have  gone  in  favour 
of  London  up  to  gold  point,  and  the  movement  of 
gold  from  Sydney  to  London  might  be  expected  to 
begin. 

In  the  case  of  large  amounts,  and  of  places  far 
distant,  the  element  of  time  becomes  important. 
If  exchange  between  London  and  Sydney  were  at 
par,  it  might  still  pay  an  Australian  banker  to  give 
more  than  a  sovereign  in  Sydney  for  a  sovereign 
in  London  because  he  would  receive  the  sovereign 
in  London  at  once,  and  his  balance  in  Sydney 
would  only  be  drawn  on  five  weeks  hence  when  the 
draft  arrived.  So  that  he  would  have  the  use  of 
your  money  for  five  weeks,  and  in  times  when  the 
rate  of  interest  is  high  this  is  an  important 
consideration. 

In  the  example  just  considered,  where  the  ex- 
change between  London  and  Sydney  was  strongly 
in  favour  of  London,  it  was  supposed  that  a  sove- 
reign, or  a  sovereign's  worth  of  credit,  in  London 
might  fetch  £i  os.  6d.  in  Sydney.  If  the  tendency 
of  the  balance  of  indebtedness  were  flowing  in  the 
other  direction,  and  there  were  a  great  demand  for 
drafts  payable  in  Sydney,  London's  currency  would 
be  depreciated  as  compared  with  Sydney's,  and  a 
sovereign  here  might  only  fetch  195.  6d.  on  the 


i8o  THE  MEANING  OF  MONEY 

other  side.  But  this  depreciation  could  only 
work  up  to  the  point  at  which  it  would  pay 
those  who  have  debts  to  pay  in  Sydney  to  pack 
sovereigns  and  send  them  rather  than  make  use  of 
the  machinery  of  exchange.  If  you  were  offered 
only  195.  in  Sydney  in  exchange  for  your  sovereign 
here  you  would  obviously  inform  the  dealers  in 
exchange  that  you  preferred  to  dispense  with  their 
services,  and  would  ship  the  sovereigns  to  your 
Australian  creditor. 

Restating  the  matter  yet  again  in  the  effort  to 
be  clear,  we  may  express  it  by  saying  when  the 
number  of  people  who  want  to  send  money  from 
Sydney  to  London  is  greater  than  the  number  of 
those  who  want  to  send  money  from  London  to 
Sydney,  the  latter  will  be  in  an  advantageous  posi- 
tion, and  able  to  buy  drafts  on  favourable  terms.: 
but  that  the  amount  in  Sydney  that  their  sove- 
reigns or  cheques  representing  sovereigns  in  Lon- 
don will  fetch  cannot  rise  above  the  exact  equivalent 
plus  the  cost  of  remitting  coin  from  one  centre 
to  the  other.  When  that  point  is  reached  the 
exchange  is  at  gold  point 

What  is  called  the  mint  par  between  the  two 
places  is  in  this  case  the  sovereign,  and  if  the  cost 
of  remittance,  insurance,  etc.,  be  6d.,  as  we  have 
supposed  for  the  sake  of  simplicity,  the  outside 
fluctuation  of  the  exchange  will  be  is. ;  for  if  it 
cost  Sydney  over  sos.  6d.  to  buy  a  sovereign  in 


LONDON  AND   PARIS  181 

London,  Sydney  will  ship  gold  to  London  rather 
than  buy  drafts ;  and  if  a  sovereign  in  London  fetch 
less  than  195.  6d.  in  Sydney,  Sydney  will  import 
gold  from  London. 

We  can  now  proceed  to  consider  the  question 
as  it  appears  when  the  balance  of  indebtedness  is 
being  settled  between  two  countries  which  use  a 
different  currency. 

In  France  the  unit  is  the  franc,  so  that  when  a 
Frenchman  wants  to  send  money  to  London  he 
wants  to  exchange  francs  into  sovereigns;  con- 
versely, an  Englishman  who  wants  to  send  money 
to  Paris  has  to  exchange  sovereigns  for  francs. 

The  relative  value  of  the  two  currencies 
measured  in  the  amount  of  gold  contained  in  the 
sovereign  and  the  2O-franc  piece  is  2$f.  220.  to  the 
sovereign.  The  normal  exchange  or  mint  par  is  thus 
ruling  when  the  Paris  cheque  is  quoted  at  25/1  220. 

The  cost  of  sending  gold  in  either  direction  may 
be  taken  at  "jc. ;  so  that  if  you  ship  gold  each  sove- 
reign's worth  of  it  will  be  worth  to  you  in  Paris 
25/  i$c.,  having  shed  70.  on  the  way  in  expenses. 
Consequently,  if  you  can  buy  a  bill  on  Paris  at  any 
higher  rate  it  will  pay  you  to  do  so  rather  than 
send  gold. 

Whether  you  will  be  able  to  do  so  will  depend 
on  the  value  of  money  in  Paris  as  compared  with 
London,  and  on  the  balance  of  indebtedness  between 
London  and  Paris.  If  the  rate  of  interest  is  higher 


182  THE  MEANING  OF  MONEY 

in  Paris  than  in  London,  London  will  want  to  send 
money  to  Paris  to  earn  the  higher  rate,  and  if  Paris 
has  been  selling  us  more  goods  and  securities  and 
services  than  we  have  been  selling  to  her,  Paris 
will  have  more  bills  on  London  arising  out  of  those 
sales  than  London  has  bills  on  Paris ;  consequently, 
the  demand  in  London  for  bills  on  Paris  will  be 
keener  than  the  demand  in  Paris  for  bills  on 
London,  because  London  has  more  remittances 
to  make. 

Hence  it  will  follow  that  the  seller  of  a  bill  on 
Paris  will  be  able  to  get  more  favourable  terms,  and 
the  exchange  will  be,  as  it  is  called,  in  his  favour  ;  in 
other  words,  his  francs  will  be  relatively  more  valu- 
able than  the  sovereign,  and  the  sovereign  will  fetch 
less  when  expressed  in  francs.  And  if  the  balance  of 
indebtedness  be  heavy  enough,  and  the  competition 
of  those  who  want  to  buy  drafts  on  Paris — that  is, 
to  exchange  sovereigns  for  francs — be  keen  enough, 
the  value  of  sovereigns  expressed  in  francs  will  go 
down  to  2$f.  i$c.,  and  then  those  who  have  remit- 
tances to  make  will  begin  to  ship  gold  instead  of 
buying  drafts,  the  Paris  exchange  having  gone 
down  to  gold  point. 

When  the  balance  is  the  other  way,  and  London 
has  been  selling  more  goods  and  securities  and 
services  to  Paris  than  Paris  has  been  selling  to 
London,  bills  on  Paris  will  be  more  plentiful  than 
bills  on  London,  and  the  French  importers  of  goods, 


LONDON  AND   PARIS  183 

etc.,  will  have  to  compete  for  drafts  on  London  in 
which  to  make  their  payments.  That  is,  they  will 
have  to  pay  more  in  francs,  which  will  be  relatively 
depreciated,  for  the  sovereigns  that  they  need  for 
the  payment  of  their  debts,  and  their  competition 
will  force  the  exchange  up  towards  25/  2gc.r  which 
will  be  the  other  gold  point,  when  shipments  of  the 
metal  may  be  expected.  But  it  must  not  be  for- 
gotten that  the  relative  value  of  money  in  the  two 
centres  is  a  constant  influence  which  may  increase 
or  modify  the  movement  of  exchange  due  to  the 
influence  of  indebtedness  for  goods  and  services. 
If  London  has  sold  large  amounts  of  goods  to  Paris, 
but  money  is  dear  in  Paris,  the  two  influences  will 
tend  to  counteract  one  another ;  London  will  leave 
the  proceeds  of  its  sales  in  Paris  to  earn  the  higher 
rate  of  interest,  and  as  long  as  it  does  so  those  sales 
will  not  affect  the  exchange. 

It  may  have  been  noted  that  the  French  ex- 
change is  against  London  when  it  is  low  and  in 
London's  favour  when  it  is  high.  And  this  is 
natural  and  inevitable  when  we  consider  that  the 
quotation  expresses  the  value  in  francs  which  a 
sovereign  will  fetch.  When  this  value  is  low  the 
holder  of  a  sovereign  receives  less  in  francs,  and  so 
the  exchange  is  very  literally  against  him.  When 
you  want  to  buy  francs  with  your  sovereign,  the 
more  francs  you  get  for  it  the  better  it  is  for  you. 
When  the  rates  of  exchange  are  quoted  in  English 


i84  THE  MEANING  OF  MONEY 

money,  it  is  otherwise.  The  Argentine  dollar  is 
quoted  in  pence.  When  it  rises  from  48^.  to  48^. 
it  moves  against  England,  because  it  fetches  more 
pence,  and  any  one  who  wants  to  exchange  sove- 
reigns for  dollars  will  receive  less  of  them.  This 
is  one  of  the  small  complications  which  make  the 
question  of  the  exchanges  so  difficult  to  the  inex- 
perienced. But  it  can  always  be  met  by  considering 
that  the  ultimate  fact  expressed  by  rates  of  exchange 
is  the  relative  value  between  a  sovereign  and  a 
fojeign  currency.  When  the  sovereign  buys  more 
of  the  foreign  currency  the  exchange  has  moved  in 
our  favour;  when  it  buys  less  the  exchange  has 
moved  against  us. 

It  thus_becomes  evident  that  the  foreign   ex- 
changes  are  a  mechanism  by  which  international 
indebtedness  is  settled  between  one  country  and 
another,  and  that  rates  of  exchange  are  the  prices 
at  which  the  currencies  of  the  various  countries  are 
expressed  relatively  to   one  another.     When   the 
balance  of  claims   between  two  places  does  not 
roughly  agree  gold  has  to  be  shipped  to  settle  the 
difference,  unless  it  can  be  met  by  what  is  called 
arbitrage,  which  consists  of  dealings  in   bills  on 
other  centres.     For  instance,  London  may  not  have 
enough  claims  on  Paris  to  set  off  the  claims  of  Paris 
)on  it,  but  may  be  able  to  fill  the  gap  with  bills  on 
/Berlin,   or    some  other  centre,  which  Paris  may 
:  happen  to  want 


A  CLEARING  SYSTEM  185 

The  system  on  which  the  exchanges  work  is 
thus  similar  to  that  of  the  bankers'  Clearing  house 
in  London.  In  it  the  claims  of  the  clearing  banks 
are  crossed  off  against  one  another,  and  any  balance 
that  is  due,  for  example,  from  the  Westminster 
Bank  to  the  County,  is  settled  by  the  deduction  of 
part  of  the  Westminster's  credit  at  the  Bank  of 
England  and  its  addition  to  the  County's.  Bat4» 
the  case  of  international  indebtedness,  the  balances 
have  to  be  settled  by  shipments  of  gold.  Such,  at 
least,  is  the  theory  of  the  matter,  though  the  restric- 
tions that  most  of  the  chief  Continental  centres 
place  on  withdrawals  of  gold  often  prevent,  or  at 
least  postpone,  the  working  of  the  machinery  of 
exchange  in  accordance  with  theory. 

The  broad  principle  which  has  been  thus  set 
forth  and  exemplified  is  the  ultimate  basis  of  the 
movements  in  the  rates  of  exchange  between  all 
countries,  even  those  which  have  currencies  based 
on  different  metals,  or  in  the  case  of  those  in  which 
the  currency  is  based  on  nothing  but  the  printing- 
press.  But  it  need  hardly  be  said  that  there  can  be 
no  gold  point  in  the  case  of  countries  with  a  currency 
which  consists  of  silver  or  of  inconvertible  paper 
notes.  Nevertheless,  even  in  their  case,  though  the 
fluctuation  of  exchange  is  complicated  by  variations 
in  the  price  of  silver  or  by  new  issues  of  paper  cur- 
rency, yet  the  balance  of  relative  indebtedness  be- 
tween them  and  other  countries  is  still  an  important 


186  THE  MEANING  OF  MONEY 

factor,  ready  to  assert  its  complete  predominance 
at  any  moment  when  other  complicating  influences 
cease  from  troubling. 

Since,  then,  it  is  largely  on  the  mutual  indebted- 
ness of  various  countries  that  rates  of  exchange  are 
based — though  we  must  not  forget  the  influence  of 
the  rate  of  interest  in  the  various  centres — let  us  see 
how  this  mutual  indebtedness  arises. 

The  most  obvious  cause  of  it  is  the  mutual 
exchange  of  natural  produce  and  manufactured 
articles — the  balance  of  trade,  as  it  is  generally 
called.  This  we  see  chronicled  in  the  monthly 
returns  issued  by  the  Board  of  Trade  of  British 
imports  and  exports.  These  always  show  that 
England  has  imported  goods  of  much  greater  value 
than  those  which  she  has  exported,  and  because 
there  is  no  published  record  of  her  other  exports — 
her  invisible  exports,  as  they  are  sometimes  called 
— superficial  observers  are  often  very  much  fright- 
ened about  the  state  of  English  trade  and  draw 
astonishing  inferences,  the  most  notable  of  which 
was  propounded  by  a  colonial  premier  who  told  an 
English  audience  that  England  had  to  export 
annually  so  many  millions  of  golden  sovereigns  to 
pay  for  the  balance  of  the  cost  of  her  imports  over 
that  of  her  exports. 

In  fact,  an  "unfavourable"  balance  of  trade, 
which  is  the  misleading  description  given  to 
this  condition  of  the  purely  commercial  relations 


THE  "  UNFAVOURABLE  '•  BALANCE  187 

between  one  country  and  another,  is  one  that 
can  only  be  afforded  by  countries  of  the  highest 
economic  development  which  are  in  a  position 
to  supply  other  countries  with  credit  and  other 
services,  which  the  other  countries  have  to  pay  for 
with  their  goods.  And  the  distinction  of  possess- 
ing an  unfavourable  trade  balance  is  shared  with 
England  by  France  and  Germany. 

At  the  same  time,  those  who  are  alarmed  by  the 
extent  of  the  difference  between  the  value  of  our 
visible  exports  and  imports  are  justified  to  this 
extent,  if  they  consider  that  it  is  better  for  England 
to  be  a  manufacturing  country  than  a  creditor  and 
banking  country.  A  large  part  of  our  invisible 
exports  consists  of  services  rendered  by  the  clerk- 
ing and  financing  classes,  and  those  critics  of  our 
trade  position  who  do  not  ignore  them,  but  maintain 
that  they  would  prefer  to  see  them  replaced  by 
goods  worked  up  by  the  producing  and  manufactur- 
ing classes,  take  up  an  attitude  which  is  perfectly 
logical.  The  more  common  course,  however,  is  to 
ignore  these  invisible  exports  altogether,  as  was 
done  by  Mr.  Seddon  in  the  speech  referred  to  above, 
and  to  deduce  the  alarming  conclusion  that  we  are 
living  on  our  capital,  and  otherwise  in  a  terribly 
decadent  and  deplorable  condition,  from  the  com- 
mercial point  of  view. 

This  being  so,  though  it  is  an  oft-told  tale,  it 
is  perhaps  worth  while  to  enumerate  some  of  the 


i88  THE  MEANING  OF  MONEY 

invisible  exports  by  means  of  which  we  fill  the  big 
gap  between  the  values  of  our  imports  and  exports 
of  visible  goods. 

Let  us  consider  the  case  as  it  stands  between 
us  and  the  United  States.  The  United  States 
supply  us  with  a  vast  and  valuable  amount  of  food 
and  raw  material,  and  take  from  us  manufactured 
goods,  the  amount  of  which  is  severely  restricted 
by  their  high  Protectionist  tariff.  On  the  other 
hand,  we  export  to  them  the  following  "  invisible  " 
items : — 

(1)  Shipping   freights.     Our  ships  carry  goods 
to  and  from  them  all  over  the  world. 

(2)  Interest  coupons.    The  American  securities 
held  by  English  investors  yield  a  constant  income 
in  interest,  to  meet  which  the  United  States  has 
to  send  goods. 

(3)  Insurance  facilities.    The  English  insurance 
companies  and  firms  do  a  large  business  in  the 
United  States,  and  draw  thence  a  regular  income 
in  premiums. 

(4)  Banking  facilities.     The  large   sums   spent 
annually  by  Americans  in  Continental  travel  are,  to 
a  great  extent,  financed  by  drafts  on  London,  on 
which  London  takes  toll.     Still  greater,  probably, 
is  the  profit  that  London  regularly  makes  by  dis- 
counting bills  for  America,  financing  its  speculations 
by  carrying  over  shares  for  it  in  the  London  market, 
and  making  advances  in  other  forms. 


ENGLAND  AND  THE   UNITED   STATES  189" 

(5)  Pleasure,  social    amenities,  titles,  and    art 
treasures.    Americans  in  times  of  prosperity  spend 
a  constantly  increasing  amount,  in  travel  and  enjoy- 
mentin  England.     Many  of  them,  it  is  said,  are 
anxious  to  cut  a  figure  in  what  is  called  Society, 
and  the  lavish  expenditure  in  which  they  indulge 
is  believed  to  be  of  some  assistance  to  this  ambition. 
All  This  expenditure  here  on  their  part  has  the 
same  effect  on  the  balance  of  Anglo-American  in- 
debtedness as  an  English  export.     It  is  also  well 
known  that  the  scions  of  ancient  English  families 
frequently  find  wives  among  the  attractive  daughters 
of  America,  and  the  big  dowries  that  the  latter  bring 
with  them  amount  to  a  considerable  annual  charge 
on  the  United  States.    The  habit  of  purchasing  art 
treasures,  lately  rife   among    rich    Americans,   is 
another  item  in  the  balance.    The  fact  that  owing 
to  American  tariff  regulations  many  of  these  art 
treasures  are  left  here  does  not,  of  course,  interfere 
with  the  effect  on  international  indebtedness  pro- 
duced by  their  purchase. 

(6)  Family    affection.     Many   of  the    English, 
and  especially  Irish,  settlers  in  America  regularly 
remit    sums    to     their    parents    and    families    in 
England,   taking   nothing  in  return   but  affection 
and  gratitude.     Every  one   who  has  read  "Some 
Experiences   of  an    Irish    R.M."   remembers    the 
picture    of   McCarthy,  the    horse-dealing  farmer 
who  charged  Mr.  Bernard  Shute  £45  for  a  mare, 


IQO  THE  MEANING  OF  MONEY 

saying,  "She's  too  grand  entirely  for  a  poor  farmer 
like  me,  and  if  it  wasn't  for  the  long  weak  family 
I  have,  I  wouldn't  part  with  her  for  twice  the 
money."  The  long  weak  family  was  explained  by 
Mr.  Flurry  Knox  to  be  "three  fine  lumps  of 
daughters  in  America  paying  his  rent  for  him." 

The  above  list  might  be  continued,  but  sufficient 
examples  have  been  given  to  show  that  there  are 
many  more  exports  in  heaven  and  earth  than  are 
dreamt  of  by  the  philosophy  of  the  Board  of  Trade 
returns.  It  must  not  be  supposed  that  the  move- 
ment of  these  items  is  all  in  one  direction.  American 
ships  carry  English  goods,  American  insurance 
offices  do  business  in  England,  and  Englishmen 
spend  money  on  travel  and  sport  in  America.  It 
is  only  claimed  that  on  the  above  counts  America 
normally  owes  more  to  England  than  England  owes 
to  America,  and  that  credits  under  these  heads 
go  far  to  neutralize  the  so-called  "unfavourable" 
balance  of  trade. 

It  need  not,  of  course,  be  supposed  that  the  final 
balance,  after  allowing  for  all  exports  and  imports, 
visible  and  invisible,  must  be  exactly  equal  between 
any  two  countries.  It  is  perfectly  possible  for  one 
country  to  be  normally  indebted  to  another  year  in, 
year  out,  on  this  balance  of  trade  in  its  widest  sense, 
and  yet  to  be  in  a  perfectly  wholesome  economic 
condition,  being  kept  so  by  being  in  a  contrary  re- 
lation with  some  other  country.  It  will  thus  be  able 


ANTICIPATORY  BILLS  191 

to  meet  the  bills  drawn  on  it  by  its  creditor  with 
those  that  it  draws  on  its  debtor,  and  thus  the  sum 
of  mutual  indebtedness  is  crossed  off  and  cancelled 
all  over  the  world,  or  met,  when  at  any  time  the 
supply  of  bills  is  inadequate,  by  movements  of 
bullion  to  settle  the  balances. 

This  case  arises,  for  example,  when  the  chief 
agricultural  countries  are  reaping  and  moving  their 
crops.  They  hold,  for  the  time  being,  the  manu- 
facturing countries  in  fee,  and  they  need  gold  for 
the  actual  circulation  of  currency  in  the  producing 
districts.  And,  consequently,  gold  moves  normally 
to  the  United  States,  Egypt,  and  Argentina  in  their 
harvesting  seasons. 

It  is  in  these  cases  that  the  utility  arises  of  the 
practice,  referred  to  in  earlier  chapters,  of  drawing 
bills  in  anticipation  of  crop  movements.  Without 
this  arrangement,  countries  whose  staple  export  is 
harvested  at  a  certain  season  would  take  payment 
in  gold  for  it  at  that  season,  and  would,  during  the 
rest  of  the  year,  have  to  remit  in  gold  for  the  goods 
and  services  that  it  buys  from  other  countries.  But 
the  dealers  in  exchange,  and  the  more  legitimate 
class  of  finance  bill,*  provide  the  means  by  which,  at 
times  when  such  a  country  has  nothing  to  export,  the 
exchange  dealers  will  make  good  profits  by  creating 
bills  against  nothing,  but  in  anticipation  of  the  crop 
that  is  in  the  ground,  with  the  result  that  the  country 
•  Page  48. 


192  THE  MEANING  OF  MONEY 

exports  less  gold  in  its  off  seasons,  and  imports  less 
when  its  crop  is  ready.  Its  imports  of  machinery 
in  July  are  paid  for  by  semi-fictitious  remittances, 
created  by  exchange  dealers  who  draw  finance 
bills  and  so  raise  credits,  and  these  bills  are  met 
later  by  the  shipment  of  the  country's  crops  in 
September,  and  by  the  bills  genuinely  drawn 
against  them.  And  so  the  clumsy  necessity  for 
sending  gold  backwards  and  forwards  across  the 
oceans  is  reduced,  though  not  extinguished. 

It  need  not  be  said  that  it  is  quite  impossible  to 
gauge  the  amount  and  value  of  the  invisible  com- 
modities, which,  as  above  enumerated,  have  so  im- 
portant an  effect  on  the  balance  of  international 
indebtedness,  and  so  on  the  foreign  exchanges.  And 
one  of  the  most  elusive  of  the  influences  which  thus 
complicate  the  question  is  that  of  the  purchase  and 
sale  of  securities  between  one  country  and  another. 
But  it  has  to  be  considered  now  because  it  is 
closely  connected  with  the  main  question  dealt  with 
in  this  inquiry. 

When  one  country  raises  a  public  loan  in  an- 
other, everybody  is  well  aware  of  the  transaction, 
and  there  is  no  difficulty  about  the  matter.  For 
example,Brazil  borrows  three  millions  in  the  London 
market  by  an  issue  of  5  per  cent,  bonds.  The  issue 
is  advertised  and  subscribed,  there  is  an  open  market 
in  the  bonds,  and  it  is  all  clear  and  above-board. 
Brazil  has  exported  to  England  three  millions'  worth 


EFFECT  OF  LOAN   ISSUE  193 

of  its  promises  to  pay ;  England  has  returned  to 
Brazil  three  millions'  worth  of  money  or  credit,  or 
the  right  to  draw  on  London,  either  by  taking  gold 
or  by  using  its  credits  here  to  cancel  debt  elsewhere, 
or  to  make  any  purchases  required.  The  immediate 
effect  of  the  transaction  will  be  to  turn  the  exchange 
in  favour  of  Brazil,  though  it  must  always  be  re- 
membered that  the  overt  working  of  this  effect  may 
be  veiled  by  other  influences.  During  the  currency 
of  the  loan  the  effect  of  its  existence  will  be  to  turn 
the  exchange  in  favour  of  London,  because  Brazil 
will  be  obliged  to  remit  periodically  to  meet  the 
quarterly  or  half-yearly  interest  payments  and  the 
service  of  the  sinking  fund  established  to  extinguish 
the  loan  gradually  by  purchase  or  drawings  of  the 
bonds. 

Hence  it  is  that  no  debtor  country — that  is,  no 
country  which  has  borrowed  extensively  from  the 
investors  and  money-lenders  of  other  countries — 
can  afford  the  luxury  of  what  is  called  an  unfavour- 
able trade  balance.  In  order  to  meet  its  interest 
payments  and  its  sinking  fund  arrangements,  it 
must  habitually  ship  more  goods  than  it  receives, 
since  the  lenders  are  continually  sending  it  interest 
coupons  and  drawn  bonds,  the  payment  of  which 
it  has  to  provide  for  either  with  goods  or  with 
fresh  borrowing. 

In  otner  words,  what  is  usually  called  a  favour- 
able trade  balance  may  generally  be  taken  as  a  sign 

o 


194  THE  MEANING  OF  MONEY 

of  the  economic  dependence  of  the  country  which 
possesses  it. 

The  same  effect  on  the  exchanges  is  produced 
when  the  borrowing  is  done,  not  by  the  Govern- 
ment of  the  borrowing  country,  but  by  companies ; 
as,  for  example,  when  the  Pennsylvania  Railroad 
sells  £4,000,000  bonds  here,  the  operation  for  the 
moment  turns  the  exchange  in  favour  of  the  United 
States,  but  during  the  currency  of  the  bonds  pro- 
duces a  periodical  claim  by  London  on  New  York 
for  interest  payments. 

These  public  issues  of  loans  are  potent  and  ob- 
vious influences  on  the  exchange.  But  an  equally 
important  effect,  which  is  difficult  to  trace,  is  pro- 
duced by  the  purchases  of  securities  made  by  the 
investors  of  one  country  in  the  Bourses  of  another. 

It  is  the  natural  tendency  for  a  debtor  country, 
as  it  makes  economic  progress,  to  buy  up  gradually 
the  securities  on  which  it  has  borrowed  from  others, 
and  so  to  reduce  or  extinguish  the  amount  that  it 
has  to  provide  abroad  for  interest  payments.  For 
example,  Italian  Rentes,  the  public  debt  of  Italy, 
were  formerly  largely  in  the  hands  of  foreign 
holders  in  France,  Germany,  and  England.  Italy's 
economic  progress  has  been  remarkable  ever  since 
her  ambitions  in  the  direction  of  colonial  expansion 
and  world-politics  received  a  timely  check  on  the 
Red  Sea.  Since  then  she  has  developed  her  in- 
ternal resources  with  great  success,  and  she  has 


ITALY'S  EXPORT  195 

been  assisted  by  the  possession  of  an  inexhaustible 
asset  which  she  exports  continually,  or  rather  lets 
other  people  come  and  enjoy.  For  Italy  holds  the 
world  in  fee  as  an  exporter  of  Beauty — beauty  in 
scenery,  beauty  in  atmosphere,  beauty  in  buildings, 
sunshine,  association,  and  a  hundred  other  things, 
besides  her  art  treasures,  which  it  would  be  absurd 
to  call  priceless,  because  to  think  of  price  in  con- 
nection with  them  would  be  a  vulgar  irrelevance. 
Every  year  an  increasing  number  of  travellers  from 
all  lands  pours  into  Italy  to  see  these  things,  bring- 
ing circular  notes  and  other  forms  of  drafts  where- 
with to  pay  their  way ;  and,  in  order  to  meet  these 
drafts  and  to  feed  the  balances  with  their  Italian 
agents  on  which  they  are  drawn,  the  other  countries 
have  to  send  Italy  goods,  or  services,  or  securities. 
Thus  Italy  has  been  enabled  to  buy  up  a  large  pro- 
portion of  her  own  securities  which  were  formerly 
held  by  foreign  investors.  Consequently,  she  has 
largely  relieved  herself  of  the  drain  against  coupons, 
and  her  exchange  has  moved  rapidly  in  her  favour. 
So  much  so  that  travellers  in  Italy  who  have  not 
been  there  for  some  years  are  astonished  to  find 
how  much  less  valuable  the  English  sovereign  has 
become  when  measured  by  its  exchange  price  in 
Italian  currency. 

These  purchases  of  securities  by  the  investors 
of  one  nation  in  the  Stock  Exchanges  of  others  are 
a  constantly  fluctuating  element,  which  has  a  marked 


196  THE  MEANING  OF  MONEY 

effect  on  the  balance  of  national  indebtedness,  and 
is  extremely  difficult  to  trace  or  gauge.  Equally  so 
is  the  perhaps  still  more  important  element  pro- 
vided by  the  shifting  from  one  centre  to  another  of 
the  more  highly  specialized  forms  of  securities,  chief 
among  which  is  the  bill  of  exchange.  And  when  we 
arrive  at  the  ebb  and  flow  of  this  restless  ocean  we 
come  to  the  point  at  which  the  foreign  exchanges 
most  obviously  affect  the  main  subject  of  our  in- 
quiry, and  it  begins  to  be  clear  that  this  attempt  to 
explain  them  was  by  no  means  an  irrelevant  inflic- 
tion. For  the  movements  of  bills  of  exchange  from 
one  centre  to  another  depend  to  a  great  extent  on 
the  rates  of  discount  respectively  current  in  them. 

If  the  rate  of  discount  be  relativelylow  in  London, 
bills  will  be  poured  in  from  abroad  to  be  discounted 
and  turned  into  cash  here,  and  foreigners  will  use 
their  credits  here,  and  draw  bills  on  London  and 
discount  them ;  and  so  our  imports  of  securities 
will  be  increased,  and  theTexchanges  will  be  turned 
against  us.  And  if  the  exchanges  are  against  us, 
and  gold  is  being  taken  from  London,  this  state  of 
affairs  is  remedied  by  a  rise  in  the  rate  of  discount 
here,  which  checks  this  import  of  bills  and  impels 
foreigners  to  remit  funds  to  London  to  be  employed 
in  the  purchase  of  bills;  and  if  the  process  is  con- 
tinued, we  begin  to  export  securities,  and  thus  turn 
the  exchanges  in  our  favour.  And  so  we  begin  to 
see  the  great  importance  of  the  market  rate  of 


CONCLUSIONS  SUMMARIZED          197 

discount,  owing  to  its  effect  on  the  foreign  ex- 
changes, and  through  them  on  the  ease  or  difficulty 
with  which  our  supply  of  gold  is  maintained. 

We  have  thus  arrived,  through  the  thorny  laby- 
rinth penetrated  in  this  chapter,  at  a  result  which 
may  be  summarized  thus  : — 


The  foreign  exchanges  are  the  expression  of  „ 
international  indebtedness. 

International  indebtedness  is  the  balance  arising 
from  the  exchange  between  countries  of  goods, 
services,  and  securities.  The  movement  of  securities, 
especially  of  bills  of  exchange,  depends  largely  on 
the  discount  rates  current  in  the  chief  financial 
centres. 

The  discount  rate  has  thus  an  important  bearing 
on  the  foreign  exchanges. 

It  has  also  been  shown  that  when  the  foreign 
exchanges  go  to  a  certain  point,  gold  will  be  taken 
from  London,  because,  for  example,  it  will  pay  better 
to  send  gold  to  Paris  than  to  take  only  25  fr.  15  c. 
for  one's  sovereign  on  'change. 

And  gold  is  part   of  the   basis  of  our  credit 
system,  since  the  notes  and  cheques  which  we  use      \ 
in  commercial  and  financial  transactions  are  all  con-       \ 
vertible  on  demand  into  gold,  and  cannot  safely 
be  multiplied  beyond  a  certain  point  unless  the 
stock  of  gold  ready  to  meet  them  if  asked  for  be      1 
increased  also.  / 

So  that  we  are  now  beginning  to  see  more  clearly 


198  THE  MEANING  OF  MONEY 

the  importance  of  the  market  rate  of  discount,  and 
the  need  for  its  sagacious  regulation. 

The  market  rate  of  discount  depends,  on  the  one 
hand,  on  the  supply  of  money,  and,  on  the  other,  on 
the  supply  of  bills  of  exchange  which  come  forward 
to  be  turned  into  money.  We  have  already  examined 
the  chief  parts  of  the  machinery  which  creates  and 
handles  money  and  bills  of  exchange — the  banks,  bill- 
brokers,  and  accepting  houses — and  we  found  that 
in  normal  times  the  supply  of  money  and  the  level 
of  discount  rates  are  regulated  by  the  banks.  We 
are  now  in  a  position  to  try  to  understand  the 
functions  of  the  institution  which  takes  control  of 
the  machinery  when  times  are  not  quite  normal,  and 
regulates  the  supply  of  money  and  the  market  dis- 
count rate  in  order  to  affect  the  foreign  exchanges 
when  this  intervention  is  considered  necessary. 
This  institution  is  the  Bank  of  England. 


CHAPTER  XI 

THE   BANK   OF  ENGLAND 

EVERY  schoolboy  knows,  and  most  grown-up  people 
have  consequently  forgotten,  that  the  Bank  of 
England  was  founded  in  1694  to  finance  William  III.'s 
Government.  Since  its  foundation  it  has  been  the 
keeper  of  the  national  balance  and  the  channel 
through  which  the  nation  has  conducted  its  financial 
operations. 

Its  notes  are  the  only  form  of  paper  currency 
that  is  legal  tender  in  England,  that  is  to  say,  that 
has  to  be  accepted  in  payment  of  a  debt,  and  it  is 
the  only  joint-stock  bank  which  is  allowed  to  issue 
notes  in  London.  As  we  have  seen,  the  advantages 
possessed  by  the  cheque  have  enabled  it  to  supplant 
the  note  as  circulating  currency,  but  the  Bank's 
privileges  in  the  matter  of  note  issue  undoubtedly 
were  of  great  service  to  it  in  its  earlier  history,  and 
were  an  important  cause  of  the  prestige  which  now 
makes  its  name  a  household  word  for  stability  and 
soundness  throughout  the  civilized  world.  It  may 
also  be  presumed  that  they  were  an  indirect  cause 
of  the  fact  that  now  gives  the  Bank  its  source  of 


200  THE  MEANING  OF  MONEY 

greatest  strength  and  importance;  namely,  its  posi- 
tion as  the  bankers'  bank. 

It  has  already  been  shown  that  the  Bank  of 
England's  privilege  in  the  matter  of  note  issue  in 
London  was  intended  to  give  it  the  monopoly  of 
joint-stock  banking  in  London,  and  that  the  flank 
of  this  monopoly  was  only  turned  when  it  was  dis- 
covered that  note  issuing  was  not  an  essential  part 
of  banking.  The  result  of  this  discovery,  instead  of 
weakening  the  Bank  of  England  by  the  creation  of 
a  host  of  nimble  competitors,  strengthened  it 
by  providing  it  with  a  number  of  enterprising 
and  wealthy  customers,  who  developed  banking 
facilities  all  over  the  country  in  a  manner  which 
would  have  been  impossible  to  it  without  a  radical 
alteration  in  its  machinery  and  constitution,  left 
with  it  the  cash  balances  that  were  not  required  for 
their  till  money  and  country  reserves,  and  so  not 
only  increased  its  dignity  and  visible  strength,  but 
made  its  task  of  financing  the  Government  simpler 
and  cheaper,  reducing  it  to  a  great  extent  to  a  matter 
of  entries  in  its  own  books. 

For  see  what  happens  when  the  Government 
has  to  pay  its  quarterly  dividends  on  Consols  and 
other  Government  stocks,  and  finds  itself  in  need  of 
two  millions  or  so  for  this  purpose.  It  borrows  two 
millions  from  the  Bank  of  England,  and  the  Bank 
of  England  gives  it  a  credit  for  this  amount  in  its 
books,  against  which  the  Government  draws  its 


EMERGENCY   CURRENCY  201 

dividend  warrants.  But  only  a  small  fraction  of 
this  amount  is  actually  withdrawn.  For  the  most 
part  the  warrants  are  paid  into  the  other  banks  to 
the  credit  of  their  Consols-owning  customers,  and 
are  paid  in  by  them  to  the  Bank  of  England  to  the 
credit  of  their  balances  with  it.  So  that  instead  of 
making  a  great  provision  of  cash  the  Bank  only  has 
to  set  its  clerks  to  work  with  their  pens  rather  faster 
than  usual,  and  the  thing  is  done.  Thus  two  of  the 
principal  duties  of  the  Bank  of  England,  its  manage- 
ment of  the  Government's  money  matters  and  its 
custody  of  the  other  banks'  balances,  fit  into  and 
assist  one  another  very  aptly. 

Equally  simple  is  the  Bank's  still  more  important 
task  of  providing  emergency  currency,  and  again 
for  the  same  reason,  the  fact  of  its  being  banker  to 
the  collective  banking  community.  In  all  econo- 
mically developed  communities  there  are  periods 
when  the  normal  supply  of  cash  is  insufficient,  as, 
for  example,  at  harvest  time  in  agricultural  countries 
and  at  the  ends  of  the  quarters,  when  everybody  has 
to  pay  his  rent  and  meet  other  periodical  demands, 
and  especially  in  this  country  at  the  end  of  the  two 
half-years,  when  a  large  number  of  firms  and  com- 
panies all  over  the  kingdom  draw  up  their  balance- 
sheets  and  strive  to  show  a  fine  proportion  of  cash 
in  their  assets.  And  at  the  end  of  the  December 
half-year  these  demands  coincide  with  a  big  move- 
ment of  actual  currency  into  circulation  to  provide 


202  THE  MEANING  OF  MONEY 

for  Christmas  travelling  and  money  paid  over 
tradesmen's  counters  for  Christmas  presents  and 
the  material  ingredients  of  Christmas  jollity.  Con- 
sequently, at  these  periods  there  comes  a  seasonal 
demand  for  what  is  called  money,  and  the  Bank  of 
England,  by  reason  of  being  the  bankers'  bank,  is 
able  to  provide  it  with  extraordinary  ease  and 
expedition. 

For  money  in  England,  as  we  have  long  ago 
recognized,  chiefly  means  a  credit  with  a  bank,  carry- 
ing the  right  to  draw  a  cheque.  In  so  far  as  it 
means  actual  coin  and  notes,  the  problem  here  is 
the  same  as  elsewhere,  and  the  periodical  with- 
drawals of  these  for  the  cash  payments  alluded  to 
periodically  affect  the  Bank's  reserve.  But  the  great 
proportion  of  the  seasonal  demands  are  met  by 
cheques,  and  a  large  part  of  them,  those  arising  out 
of  the  desire  to  show  large  cash  holdings  in  balance- 
sheets,  are  for  ornamental  purposes,  and  are  only 
wanted  to  impress  shareholders  and  customers. 

Hence  it  follows  that  a  large  proportion  of  the 
emergency  currency  required  at  the  end  of  the 
quarters  is  created  for  show  and  not  for  use,  and  is 
borrowed  from  the  Bank,  not  to  be  withdrawn  or 
passed  on,  but  so  as  to  figure  in  balance-sheets 
included  among  "  cash  in  hand  and  at  the  Bank  oi 
England." 

We  thus  arrive  at  an  important  distinction  be- 
tween the  credits  given  by  the  Bank  of  England  and 


CREDITS   RANK  AS   CASH  203 

those  of  the  other  credit-making  banks.  When  the 
latter  make  an  advance  against  any  kind  of  security 
or  buy  stock  for  investment,  they  create  a  deposit 
and  give  a  right  to  draw  a  cheque,  which  is  probably 
exercised;  the  cheque  drawn  transfers  the  cus- 
tomer's credit  to  the  customer  of  some  other  bank, 
and,  as  we  saw  in  Chapter  V.,  the  loans  of  one 
bank  create  the  deposits  of  another,,  except  when 
the  loans  are  raised  with  one  bank  for  repaying 
another.  But  in  the  case  of  the  Bank  of  England, 
its  position  as  the  bankers'  bank  results  ip.  any 
credits  that  it  makes  for  its  customers  being  left 
with  itself,  having  been  transferred  from  one  bank 
to  another  in  its  books ;  and,  what  is  still  more  im- 
portant, the  credits  that  it  makes  rank  as  cash  for 
the  rest  of  the  banking  world,  so  that  the  demand  for 
cash  for  ornamental  purposes  in  balance-sheets  can 
be  satisfied  with  remarkable  ease  by  book  entries. 
And  thus  banking  development  has  outwitted  and 
eluded  the  well-meant  effort  of  the  Legislature  to 
guide  and  regulate  it. 

The  Bank  of  England's  monopoly  of  note  issue, 
which  was  intended  to  give  it  the  monopoly  of  joint- 
stock  banking  in  the  metropolitan  area,  was  nullified 
by  the  discovery  that  note  issuing  was  not  the  most 
important  part  of  banking,  and  yet  some  years  after 
this  discovery  had  been  marked  by  the  foundation 
of  the  joint-stock  banks,  which  are  now,  collectively, 
the  Bank  of  England's  biggest  and  most  important 


204  THE  MEANING  OF  MONEY 

customer,  the  Legislature  passed  an  Act  which 
elaborately  regulated  the  note  issue  of  the  Bank  of 
England  as  if  its  note  issue  were  still  the  central 
feature  of  its  business  and  the  only  thing  which 
merited  the  consideration  of  parliamentary  wisdom. 

It  will  be  remembered  that  the  Bank  Charter 
Act  of  1844,  °r  Peel's  Act,  as  it  is  sometimes  called, 
laid  down  the  principle  that  the  amount  of  notes 
issued  by  the  Bank  against  securities  should  not 
exceed  the  sum  of  £14,000,000,  unless  by  the  sur- 
render of  the  note-issuing  privilege  by  other  banks, 
which  exercised  it,  of  course,  outside  the  circle  of 
the  Bank  of  England's  monopoly.  Any  more  notes 
issued  were  to  be  based  on  metal  held  in  the  Bank's 
vaults. 

The  business  of  a  bank,  as  the  word  is  now 
understood,  consists  in  providing  currency  payable 
in  gold,  and  earning  a  profit  by  calculating  the 
amount  of  gold  that  it  is  necessary  to  hold  against 
this  liability.  The  Bank  Charter  Act  thus  proposed 
to  revolutionize  banking  by  taking  away  from  the 
Bank  of  England  the  right  of  allowing  it  to  judge 
for  itself  of  the  proportion  between  cash  and  secu- 
rities that  it  held  on  the  assets  side  of  its  balance- 
sheet  against  the  notes  issued  on  the  other.  "  Your 
securities,"  it  said  in  effect,  "  are  to  remain  as  they 
are,  and  for  every  extra  £5  note  that  you  issue  in 
future  you  shall  hold  £$  in  coin  or  bullion." 

As  to  what  might  have  happened  if  the  Act 


EASE  AND   EFFICIENCY  205 

had  worked  in  the  manner  intended  by  its  pro- 
moters, is  a  matter  of  interesting  but  idle  specula- 
tion. Banking  evolution  has  evaded  or  avoided 
the  question  by  the  development  of  a  habit  of  re- 
garding a  credit  in  the  books  of  the  Bank  of  England 
as  just  as  good  as  so  many  bank-notes  or  sovereigns 
or  bars  of  bullion.  Borrowers  do  not,  as  a  rule, 
ask  it  for  notes,  but  for  a  credit  in  its  books. 

By  means  of  this  system  emergency  currency 
and  credit  are  provided  with  extraordinary  ease. 
It  has  grown  automatically,  commands  complete 
confidence,  and  works  with  a  perfection  that  no 
theoretically  planned  scheme  can  rival.  If  the 
supply  of  money  runs  short,  borrowers  come  to 
the  Bank  of  England  with  securities  of  the  kind 
that  it  approves,  and  in  the  course  of  a  few 
minutes'  conversation  with  the  principal  of  the 
discount  office  add  a  million  or  two  to  the  basis 
of  credit  as  expeditiously  and  easily  as  the  ordi- 
nary citizen  can  buy  a  pair  of  gloves.  The  machine 
is  a  miracle  of  ease  and  efficiency. 

The  result,  as  it  appears  in  the  published  state- 
ments of  the  Bank's  position,  is  merely  that  the  Bank 
of  England  shows  an  increase  in  securities  on  one 
side  of  the  balance-sheet— these  being  the  securities 
against  which  it  has  made  advances — and  an  increase 
in  deposits  on  the  other;  and  the  popular  habit 
of  gauging  the  position  of  a  bank  by  the  amount 
of  its  deposits  would  lead  hasty  observers  to  the 


206  THE  MEANING  OF  MONEY 

gratifying  conclusion  that  some  fresh  mass  of  accu- 
mulated wealth  had  been  stored  up  and  deposited  at 
the  Bank,  and  that  it  and  its  customers  were  richer 
than  ever.  Really  all  that  has  happened  is  that  the 
Bank  of  England  has  lent  "  money  "  to  some  more 
borrowers,  and,  being  banker  to  the  other  banks, 
has  been  able  to  do  so  by  making  a  book  entry, 
instead  of  seeing  the  "  money  "  taken  away  from  it 
in  the  shape  of  notes  or  coin. 

Actually,  of  course,  the  Bank  of  England's  posi- 
tion has  been,  when  strictly  considered,  weakened 
by  the  operation,  because  the  increase  in  deposits 
is  an  increase  in  liabilities,  and  the  increase  in  lia- 
bilities without  an  increase  in  cash  necessarily 
means  that  the  proportion  between  cash  and  liabi- 
lities has  been  lowered,  and  the  proportion  between 
cash  and  liabilities  is  the  most  obvious  touchstone 
that  is  first  applied  to  the  position  of  a  bank  in 
considering  its  apparent  strength.  And  this  ques- 
tion of  the  cash  brings  us  to  the  Bank  of  England's 
other  most  important  function — that  of  acting  as 
keeper  of  the  gold  reserve  for  the  rest  of  the  bank- 
ing community. 

This  function,  it  is  interesting  to  observe,  also 
arises  out  of  the  fact  that  the  Bank  of  England  is 
banker  to  the  other  banks.  They,  by  keeping  their 
balances  with  it,  have,  as  we  have  seen,  greatly 
facilitated  the  readiness  and  despatch  with  which 
the  Bank  finances  the  Government  and  creates 


A   HEAVY   RESPONSIBILITY  207 

emergency  currency;  but,  at  the  same  time,  they 
have  imposed  on  it  this  heavy  burden  and  respon- 
sibility of  maintaining  the  ultimate  reserve,  and  the 
Bank  of  England  is  never  able  to  forget  that  its 
liabilities  are  not  as  the  liabilities  of  other  banks, 
since  they  contain  ffiaf  big  block  of  bankers' 
balances,  which  the  other  banks  regard  and 
treat  as  cash,  and  use  as  part  of  the  basis  for  the 
soaring  structure  of  credit  that  they  build  up. 

The  obligation  and  responsibility  are  all  the 
more  onerous,  because  they  have  arisen,  as  it  were, 
as  an  unsuspected  irrelevance,  and  were  long  un- 
recognized and  unacknowledged.  It  might  have 
been  thought  that  when  the  Bank  Charter  Act  of 
1844  had  definitely  laid  down  the  duty  of  the  Bank 
of  England  with  regard  to  its  note  issue,  all  that  it 
had  to  do  was  to  carry  out  its  legal  responsibility 
with  due  punctuality,  and,  for  the  rest,  to  carry  on 
banking  business  on  ordinary  banking  lines. 

This,  in  fact,  was  the  view  long  entertained  by  an 
influential  section  of  the  Bank's  Court  of  Directors, 
and  its  fallacy  was  exposed  in  that  most  brilliant  of 
all  essays  in  practical  economics,  Walter  Bagehot's 
great  work  on  "Lombard  Street."  Bagehot  not  only 
exposed  the  fallacy,  but  killed  it,  buried  it,  and 
damned  it.  To  do  the  Bank  Court  justice,  it  should 
be  mentioned  that  even  those  of  the  directors  who 
maintained  it  in  theory  did  not  advocate  its  practice, 
but  spoke  of  a  33  per  cent,  cash  reserve  as  adequate, 


208  THE  MEANING  OF  MONEY 

though  the  ordinary  banks  would  even  now  regard 
such  a  proportion  as  extravagant.  In  these  days, 
even  the  theory  has  been  abandoned,  and  the  Bank 
of  England  has  so  effectually  recognized  the  gulf 
that  separates  it  from  other  bankers  that  it  normally 
shows  a  proportion  of  cash  to  liabilities  that  is 
roughly  twice  as  large  as  that  shown  by  those  of 
the  other  banks  which  are  strongest  in  that  respect, 
and  perhaps  twenty  times  as  high  as  that  which 
is  apparently  considered  adequate  by  the  weakest. 
In  other  words,  the  Bank  might,  if  it  reverted  to 
the  theory  that  it  was  only  one  bank  among  many 
working  on  the  same  principles,  double  the  amount 
of  its  liabilities  with  a  corresponding  increase  in  its 
investments  and  dividends  without  altering  the 
amount  of  its  cash. 

It  is  true  that  the  greater  part  of  the  Bank  of 
England's  cash  reserve  in  the  banking  department 
consists  of  its  own  notes  issued  by  its  issue  depart- 
ment. But  these  notes  are  secured  according  to  the 
provisions  of  the  Bank  Charter  Act,  and  the  other 
banks,  with  the  practice  of  which  we  are  now  com- 
paring the  Bank  of  England's,  include  in  their  cash 
not  only  Bank  of  England  notes  but  credits  in  its 
books. 

But  Bagehot's  brilliant  criticism  of  the  manner  in 
which  the  Bank  recognized  its  responsibilities  was 
chiefly  concerned  with  its  handling  of  the  demands 
brought  upon  it  by  internal  crises,  and  in  days  when 


EFFECT  OF  INTERNAL  CRISIS        209 

an  internal  crisis  meant  a  demand  all  over  the 
country  for  Bank  of  England  notes.  Since  its 
publication  the  position  has  been  modified  in  two 
important  respects.  In  the  first  place,  the  develop- 
ment of  the  use  of  cheques  and  of  book-entry  credits 
has  been  so  great  that  it  may  fairly  be  inferred  that 
at  least  the  early  stages  of  an  internal  crisis  need  not 
have  much  effect  in  the  shape  of  a  demand  for  notes. 
It  is,  of  course,  possible,  that  a  panic  might  arise  in 
England  so  severe  that  members  of  the  mercantile 
community  might  refuse  to  accept  one  another's 
cheques  in  payment  of  debts,  and  that  we  should 
take  a  temporary  step  backwards  to  the  exclusive 
use  of  sovereigns  and  Bank  of  England  notes.  In 
that  case  the  situation  would  have  to  be  met  by  a 
suspension  of  the  Bank  Act  in  the  old-fashioned 
style,  the  temporary  abrogation  of  the  limits  imposed 
by  it  on  the  Bank's  freedom  of  action,  and  the  un- 
limited creation  of  notes  to  meet  the  demand.  But 
apart  from  actual  general  cataclysm  it  seems  reason- 
able to  expect  that  any  gap  in  credit  might  probably 
be  filled  by  a  mere  enlargement  of  the  Bank's 
advances,  and  a  consequent  increase  in  the  credits 
which  it  gives  to  other  credit-makers  to  serve  as  a 
basis  for  their  operations.  In  other  words,  instead  of 
the  Bank's  reserve  being  depleted  by  internal  panic, 
it  might  have  the  effect  of  merely  increasing  its 
holding  of  securities  and  its  liability  under  deposits, 
as  normally  happens  at  the  end  of  the  half-years. 

p 


2io-          THE  MEANING  OF  MONEY 

In  the  second  place,  the  problem  that  the  Bank 
of  England  has  to  face  is  much  more  external  than 
it  seems  to  have  been  when  Bagehot  wrote.  During 
the  last  thirty-five  years  the  machinery  of  internal 
credit  has  worked  so  well  and  smoothly,  and  suc- 
ceeded, in  1890,  by  the  application  of  the  principle 
of  co-operative  assistance,  in  facing  a  very  serious 
difficulty  with  so  little  discomfort — when  the  magni- 
tude of  the  possible  disaster  is  considered — that  the 
possibility  of  real  internal  panic  is  almost  forgotten, 
and  is  ignored  by  some  of  our  less  prudent  banking 
institutions  to  an  extent  which  is  perhaps  a  little 
dangerous.  On  the  other  hand,  the  general  adoption 
of  the  gold  standard  by  the  economically  developed 
countries  of  the  world,  accompanied  by  the  fact  that 
London  has  remained  the  only  market  in  which 
every  draft  and  every  credit  are  immediately  con- 
vertible into  gold  as  a  matter  of  course,  has  greatly 
\  intensified  the  responsibility  of  the  Bank  of  England 
,  as  custodian  of  a  gold  reserve,  which  is  liable  to  be 
drawn  on  at  any  time  from  all  quarters  of  the  habit- 
able globe  from  which  a  draft  on  London  may  be 
presented. 

The  difficulty  of  this  task  that  it  has  to  perform 
is  increased,  if  not  created,  by  the  fact  that  it  has,  in 
normal  times,  little  control  over  the  extent  to  which 
these  credits  in  London  are  granted.  For  here  again 
we  find  that  the  other  banks  are  once  more  ultimately 
responsible,  just  as  we  have  seen  that  they  are  now 


THE  EXTERNAL  RESPONSIBILITY     211 

chiefly  responsible  for  the  creation  of  a  mass  of 
internal  credit  and  currency,  which  they  build  on  the 
foundation  of  the  Bank  of  England's  reserve,  but 
expand  at  their  own  discretion  and  at  rates  which 
have  no  connection  or  sympathy  with  the  official  rate 
that  is  named  by  the  Bank.  By  the  bills  that  they 
discount  and  lend  against,  by  financing  the  bill- 
brokers,  and  by  advancing  against  Stock  Exchange 
securities,  the  other  banks  give  foreign  financiers  a 
pull  on  the  Bank  of  England's  reserve,  and  the  Bank 
of  England  is  expected  to  maintain  it.  This  responsi- 
bility is  shared  by  the  accepting  houses,  which  by 
accepting  for  a  foreigner,  create  a  bill  which  he  can 
discount  at  the  Bank  of  England  through  a  bill- 
broker,  and  so  give  him  credit  which  he  can  convert 
into  gold. 

Owing  to  the  extent  to  which  banking  facilities 
have  been  developed  outside  it,  the  Bank  of 
England's  official  rate  is  often  a  quite  empty 
formula,  and  the  business  of  the  London  market  is 
carried  on  without  any  relation  to  it ;  and  herein  is 
another  point  in  which  the  money  market  of  to-day 
differs  from  that  described  in  Bagehot's  "  Lombard 
Street,"  for  we  find  Bagehot  constantly  assuming 
that  any  change  made  by  the  Bank  of  England  in 
its  rate  would  at  once  affect,  and  be  followed  by, 
those  current  in  the  open  market.  "At  all  ordinary 
moments,"  he  writes,  "there  is  not  money  enough 
in  Lombard  Street  to  discount  all  the  bills  in 


212  THE  MEANING  OF  MONEY 

Lombard  Street  without  taking  some  money  from 
the  Bank  of  England."  This  is  no  longer  true. 
Nowadays  the  Bank,  in  order  to  make  its  rate 
effective  often  has  to  take  special  measures  of  a 
kind  which  will  be  described  later. 

At  present  let  us  recapitulate  the  work  that  the 
Bank  of  England  has  to  do,  and  then  briefly  con- 
sider the  organization  by  means  of  which  it  faces 
its  responsibilities. 

It  keeps  the  balance  of  the  British  Government 
and  manages  its  finance. 

It  keeps  the  balances  of  the  other  banks,  which 
treat  their  credits  in  its  books  as  equivalent  to  cash. 

It  provides  emergency  currency  at  seasons  of 
stringency,  by  expanding  its  book-entry  credits  and 
so  increasing  the  amount  of  this  so-called  cash. 
If-  It  keeps  a  cash  reserve  which  is  relatively  about 
twice  as  big  as  those  of  the  other  banks  which  are 
strongest  in  this  respect,  and  perhaps  twenty  times 
as  big  as  those  of  the  weakest. 

£*  It  keeps  the  central  gold  reserve  of  the  one 
money  market  in  which  any  form  of  credit  instru- 
ment is  immediately  convertible  into  gold,  and  so 
has  to  be  ready  for  any  emergency  that  may  arise 
anywhere,  making  somebody  with  a  credit  in 
London  determined  to  take  away  its  proceeds  in  the 
shape  of  metal. 

Its  advantages  and  responsibilities  are  thus 
very  evenly  divided.  Its  acting  as  banker  to  the 


ADVANTAGES  AND  DIFFICULTIES    213 

Government  gives  it  prestige  which  is  invaluable, 
conveys  the  impression  that  it  always  has  the 
Government  behind  it,  and  in  fact  often  produces 
the  mistaken  notion  that  it  is  a  State  institution, 
instead  of  a  company  with  stock-holders.  And  its 
holding  of  the  balances  of  the  other  banks  enables 
it  to  lend  money  to  Government  and  to  create 
emergency  currency  by  a  mere  transfer  in  its 
books.  On  the  other  hand,  since  the  bankers 
use  their  balances  with  it  as  cash  and  as  the  basis 
of  the  credit  that  they  make,  the  Bank  of  England 
has  therefore  to  see  to  it  that  the  reserve  against 
these  balances  is  not  exposed  to  the  demands 
of  too  many  other  customers;  and  hence  the 
relatively  high  proportion  between  its  cash  and 
liabilities,  which  tells  heavily  on  its  power  to 
earn  dividends.  This  obligation  of  maintaining  a 
relatively  big  cash  reserve  is  increased  in  inten- 
sity, and  made  more  difficult  in  execution,  by  the 
fact  that  the  Bank  of  England  holds  the  central 
gold  stock  of  the  one  free  market  in  gold  in  the 
world,  and  has  to  be  prepared  to  meet  at  any 
moment  demands  on  it  that  may  come  forward 
from  abroad,  and  have  been  rendered  possible  by 
credits  given  by  its  credit-making  customers,  or 
created  by  accepting  houses  in  the  shape  of  bills 
discounted  with  it  through  a  bill-broker. 

Having  thus  reviewed  the  Bank  of  England's 
responsibilities    and    privileges,    difficulties    and 


214  THE  MEANING  OF  MONEY 

advantages,  let  us  see  what  kind  of  machinery  and 
organization  it  brings  to  bear  on  its  problems. 

It  is  like  no  other  bank  in  the  world,  and 
its  eccentricities  begin  before  you  have  crossed 
its  threshold.  Its  external  appearance,  which  its 
inhabitants  and  frequenters  take  as  a  matter  of 
course,  makes  the  country  visitor  gape  with  wide- 
mouthed  wonder ;  one  of  them,  on  learning  to  his 
surprise  that  it  was  not  Newgate  Gaol,  accounted 
for  his  error  by  saying  that  he  thought  it  must  be 
a  prison  because  it  had  not  any  windows.  Except 
where  pierced  by  windows  over  the  main  entrance, 
the  Bank's  external  walls  are  all  solid,  but  of  course 
it  is  part  of  its  business  to  be  among  other  things 
a  fortress,  capable  of  resisting  physical  attack  by 
needy  gentlemen  too  eager  in  the  interests  of  the 
better  distribution  of  wealth.  It  has  done  so  before 
now,  as  every  one  knows,  because  the  story  of  the 
Gordon  Riots  is  told  not  only  in  history  books  but 
in  "  Barnaby  Rudge."  Even  more  obvious  and 
impressive  is  the  low  level  of  its  roof,  and  the 
fact  that  this  big  block  of  space  in  a  spot  where 
ground  is  worth  so  much  a  foot  is  covered  by  a 
building  most  of  which  consists  of  vaults  and 
two  stories.  An  enterprising  American,  viewing 
sadly  this  waste  of  an  invaluable  site,  remarked 
that  if  that  old  bank  had  a  live  president,  he  would 
run  up  twenty  floors  on  the  top  of  it,  make  ten 
times  its  dividends  as  a  real  estate  company,  and 


THE  BUILDING  215 

not  bother  any  more  about  the  mouldy  old  banking 
business. 

Internally  it  boasts  spacious  courtyards  and  a 
garden  full  of  brilliant  bloom  and  green  leaves,  in 
seasons  when  such  things  are  possible,  making  a 
most  effective  and  restful  contrast  with  the  grim 
grey  walls,  the  roar  of  traffic  outside,  and  the  jingle 
of  gold  that  can  be  heard  occasionally  from  the  big 
hall  in  which  notes  are  being  cashed.  It  also  con- 
tains a  certain  amount  of  consecrated  ground,  part 
of  its  site  being  an  old  churchyard.  Hence  it  was 
that  an  unfortunate  giant,  who  was  also  a  clerk  in 
the  Bank,  fearing  that  his  seven  feet  of  skeleton 
would  be  too  valuable  a  prey  for  the  body-snatchers 
to  miss,  got  himself  buried  within  the  Bank's  walls 
in  the  vain  hope  that  his  bones  might  there  rest  in 
peace.  Not  many  years  ago  some  workmen  mak- 
ing alterations  in  the  vaults  came  on  a  gigantic 
human  jaw-bone;  it  was  sold  to  a  dentist,  who 
proudly  exhibits  it  to  patients,  and  so  the  giant's 
fears  have  been  partially  realized.* 

When  we  come  to  consider  the  Bank's  organiza- 
tion, its  most  striking  features  are  the  constitution 
of  its  Court  of  Directors,  and  its  system  of  govern- 
ment by  rotation,  and  these  are  points  on  which  the 
Bank's  critics  have  fastened  with  the  keenest  energy 
and  determination. 

The  Bank  Court  is  a  committee  recruited  chiefly 

*  F.  Straker,  "The  Money  Market,"  ch.  ii. 


216  THE  MEANING  OF  MONEY 

from  the  ranks  of  the  accepting  houses  and  mer- 
chant firms,  and  its  members  are  nominated  by 
itself,  subject  to  the  purely  formal  confirmation  of 
the  shareholders ;  and  it  is  an  unwritten  law  that 
no  banker  in  the  ordinary  sense  of  the  word,  that 
is,  no  one  connected  with  what  we  call  the  cheque- 
paying  banks,  can  be  a  member  of  it. 

At  first  sight  this  is  one  of  those  anomalous 
absurdities  so  common  in  England,  and  so  puzzling 
to  the  intelligent  foreigner,  who  cannot  understand 
why  we  suffer  them.  A  Court  of  Directors  ruling 
the  Bank  of  England,  and  so  performing  most  im- 
portant banking  functions,  and  yet  disqualifying  for 
membership  any  one  with  an  expert  knowledge  of 
banking,  is  a  tempting  subject  for  an  epigrammati- 
cally  minded  satirist.  But  in  fact  this  anomaly,  like 
many  of  our  others,  not  only  works  excellently  well 
in  practice,  but  is,  when  calmly  considered,  clearly 
based  on  sound  common-sense.  For  in  the  first 
place  it  would  obviously  be  undesirable  that  a 
member  of  one  of  the  outer  ring  of  banks  should 
have  the  insight  into  the  position  of  his  rivals  which 
membership  of  the  Bank  of  England  Court  would 
give  him,  unless  all  the  others  were  similarly  privi- 
leged. But  if  all  the  outer  banks  were  represented 
on  the  Bank  Court,  it  would  become  a  committee 
of  unwieldy  dimensions,  perhaps  reproducing  or 
reflecting  in  the  Bank  parlour  the  rivalries  and 
jealousies  that  stimulate  the  outer  banks  to  work 


THE  BANK   COURT  217 

against  one  another,  but  are  not  conducive  to  their 
working  together.  And  the  question  of  proportion- 
ate representation  would  be  difficult  to  settle.  As 
it  is,  the  Bank  Court,  being  free  from  connection 
with  the  outer  banks  except  by  keeping  their 
balances,  is  able  to  watch  their  proceedings  with 
a  wholly  impartial  eye,  and,  on  occasion,  to  make 
suggestions  with  salutary  effect. 

Moreover,  the  functions,  already  described,  that 
are  performed  by  the  Bank  of  England,  are  obviously 
different  in  many  important  respects  from  those 
fulfilled  by  the  outer  banks.  Its  chief  customers, 
the  Government  and  the  other  banks,  are  so  special 
in  kind  that  the  custody  of  their  funds  has  to  be 
approached  from  a  special  point  of  view,  and  the 
Bank's  duty  of  maintaining  the  gold  reserve  by  regu- 
lating the  ebb  and  flow  of  the  international  bullion 
stream  is  a  problem  for  which  the  ordinary  banker's 
training  would  be  of  little  assistance,  and  for  which 
the  Bank's  directors  are  obviously  better  qualified, 
owing  to  the  closer  touch  with  business  affairs 
abroad,  which  arises  from  their  connection  with 
the  accepting  houses  and  merchant  firms. 

Nevertheless  the  narrowness  of  choice  that 
limits  the  Bank  Court  in  selecting  its  new  members 
is  certainly  one  of  the  drawbacks  of  its  organization, 
and  its  difficulty  in  finding  fit  recruits  tends  to 
increase  owing  to  the  changing  conditions  of  modern 
business.  Some  widening  in  the  sweep  of  its  net 


2i8  THE  MEANING  OF  MONEY 

seems  to  be  desirable,  and  will  doubtless  be  brought 
about  by  the  alertness  that  the  Bank  has  shown  in 
recent  years  in  adapting  itself  to  alterations  in  its 
environment.  As  an  example  of  this  alertness  it 
may  be  mentioned  that  the  Bank  was  one  of  the 
first  institutions  in  the  City  to  adopt  female  clerical 
labour  on  a  considerable  scale. 

More  genuine  are  the  objections  to  the  rotatory 
system,  by  which  the  Governor  of  the  Bank  holds 
office  for  two  years,  having  previously  served  for 
two  years  as  Deputy  Governor,  and  then — so  say 
the  critics  of  the  system, — just  at  the  time  when  he 
has  mastered  his  duties,  retires  into  the  obscurity 
of  the  Committee  of  Treasury,  which  is  composed 
of  members  of  the  Court  who  have  "  passed  the 
chair."  Apart  from  the  objection  already  noted, 
one  result  of  this  system  is  that  a  Bank  director  is 
not  likely  to  become  Governor  until  he  has  been 
many  years  a  member  of  the  Court.  Consequently 
the  new  members  of  the  Court  have  to  be  chosen 
when  young,  in  the  hope  that  in  twenty  years  or  so 
they  may  be  capable  Governors,  and  this  is  some- 
times a  matter  of  perilous  hazard. 

It  cannot  be  denied  that  the  system  by  which 
the  Governor  is  put  into  the  chair  is  somewhat  for- 
tuitous. Nevertheless,  it  has  its  advantages.  The 
Committee  of  Treasury  represents  a  body  of  experi- 
ence which  is  always  at  the  Governor's  service, 
and  the  periodic  tenure  of  office  makes  the  Governor 


THE  TEST  OF  RESULTS  219 

more  inclined  to  lean  on  the  experience  and  sug- 
gestions of  his  colleagues  on  the  Court,  and  of  the 
heads  of  the  various  departments,  and  to  be  less  a 
self-sufficing  autocrat  than  he  would  probably 
become  if  he  held  office  permanently,  as  is  often 
proposed.  And  it  is  very  important  that  the  ruler 
of  the  Bank  of  England  should  be  amenable  to,  and 
express,  the  broad  common-sense  of  the  commercial 
community  as  a  whole,  and  not  the  prejudices  and 
convictions  of  any  individual,  however  gifted.  But 
it  is  not  the  purpose  of  this  work  to  enumerate  and 
examine  the  many  proposals  that  have  been  made 
for  improving  the  constitution  of  the  Bank  of 
England.  Subjected  to  the  test  of  results,  it  shows 
a  record  that  is  not  only  unrivalled,  but  unap- 
proached.  For  no  other  institution  in  the  world 
attempts  even  to  face  the  problem  of  being  always 
ready  to  carry  out  the  immediate  conversion  of 
any  draft  on  the  centre  of  which  it  is  the  head, 
which  is  cheerfully  and  composedly  undertaken 
by  the  Bank  of  England.  The  elasticity  of  the 
English  system,  which  works  with  the  Bank  as 
its  centre,  is  the  envy  of  the  world,  and  any 
alteration,  however  slight,  in  so  delicate  a  machine 
as  a  credit  system,  might  have  effects  which  were 
not  at  all  intended. 

The  Bank  of  France  is  frequently  pointed  to  as 
the  ideal  exponent  of  international  banking  by  those 
whose  test  of  the  merits  of  a  bank  is  the  infrequency 


220  THE  MEANING  OF  MONEY 

of  the  movements  in  its  official  rate.  This  view 
naturally  appeals  to  Chambers  of  Commerce  and 
the  mercantile  community,  which  chiefly  desires  to 
have  its  money  first  of  all  cheap,  and  secondly, 
steady  in  price.  But  the  cause  which  keeps  the 
official  rate  of  the  Bank  of  France  so  steady  is  the 
fact  that  the  Bank  of  France  is  not  faced  by 
the  problem  involved  by  banking  business  as  we 
understand  it,  namely,  the  immediate  meeting  of 
liabilities  in  gold.  France  still  cherishes  relics  of 
Bi-metallism,  and  its  Bank  is  consequently  able 
to  please  itself  as  to  whether  it  will  meet  its  notes 
in  gold  or  silver.  Seated  behind  this  comfortable 
rampart,  which  protects  him  from  most  of  the  shocks 
that  banking  flesh  is  heir  to,  the  Governor  of  the 
Bank  of  France  can  maintain  the  most  dignified 
steadiness  in  his  rate,  knowing  that  if  too  many 
claims  are  presented  on  him,  he  can  tender  payment 
for  them  in  five-franc  pieces,  mere  token  counters 
whose  bullion  value  is  less  than  half  the  price  at 
which  he  can,  by  the  law  of  France,  hand  them  to 
creditors  in  payment  of  claims.  He  is  thus  enabled 
to  refuse  to  part  with  gold  except  as  and  when  he 
pleases.  It  is  a  delightful  position,  but  it  is  not 
banking,  as  we  understand  it,  and  it  has  its  limita- 
tions ;  at  times  of  crisis  even  the  Bank  of  France 
is  unable  to  ignore  altogether  what  is  happening 
in  the  outside  world,  which  is  wanting  to  turn 
securities  and  commodities  into  gold. 


THE  BANK  OF  FRANCE  221 

In  the  last  quarter  of  1907,  for  example,  when 
the  American  crisis  threw  an  exceptional  strain  on 
the  world's  money  market,  the  Bank  of  England 
faced  the  position  with  cool-headed  readiness,  and 
was  prepared  to  meet  all  demands  on  it  from 
America,  and  to  reinforce  itself  by  putting  its  rate 
up  and  drawing  in  gold  from  other  centres.  The 
determination  which  it  showed  finally  compelled 
the  Bank  of  France  to  take  some  share  in  the 
international  burden  and  to  send  three  millions  of 
its  gold,  not  to  America  but  to  London,  whence  it 
knew  that  it  could  rely  on  getting  it  back.  It  has 
been  commonly  stated  that  the  Bank  of  England 
asked  it  to  carry  out  this  operation,  but  this  is 
quite  untrue.  The  whole  arrangement  was  made 
outside  the  Bank  of  England,  which  approved 
of  but  by  no  means  asked  for  it.  The  Bank  of 
France  made  an  excellent  and  profitable  invest- 
ment in  sterling  bills,  and  helped  to  mitigate  a 
storm  which  threatened  the  French  monetary  com- 
munity with  unpleasant  consequences.  And  at  the 
same  time  it  was  enabled  to  pose  very  gracefully 
as  fairy  godmother  to  the  world  at  large,  and 
superficial  observers  cried  out  that  there  must  be 
something  in  its  management  that  enabled  it  to 
play  this  pretty  part.  If  the  Bank  of  England  had 
the  right  to  meet  its  liabilities  in  five-shilling  pieces 
containing  half  a  crown's  worth  of  silver,  it  might 
perform  with  equal  brilliance ;  but  then  the  whole 


222  THE  MEANING  OF  MONEY 

of  the  very  profitable  exchange  and  banking  busi- 
ness which  is  based  on  the  immediate  convertibility 
into  gold  of  the  draft  on  London,  would  be  an 
impossibility.  Under  these  circumstances  it  might 
be  quite  easy  to  keep  the  Bank  of  England's  rate  as 
steady  as  that  of  the  Bank  of  France.  But  Bank 
rate  has  not  yet  been  explained,  and  it,  and  its 
relations  to  the  market  rate,  will  require  a  fresh 
chapter. 


CHAPTER  XII 

BANK  RATE  AND  MARKET  RATE 

BANK  rate  is  the  official  minimum  rate  at  which  the 
Bank  of  England  will  discount  bills.  It  differs 
from  the  market  rate  of  discount  in  that  it  is 
normally  higher,  and  in  that  it  is  not  a  constantly 
fluctuating  rate,  shifting  with  the  supply  of  and 
demand  for  bills,  but  is  fixed  and  announced 
every  Thursday  morning  at  a  special  meeting  of 
the  Bank  Court,  and  except  under  most  unusual 
circumstances  is  not  changed  on  any  other  day. 
But  the  fact  that  it  is  only  the  minimum  is  occa- 
sionally enforced  in  practice,  if  the  Bank  finds  that 
too  many  bills  are  being  brought  to  it  for  discount ; 
on  such  occasions  it  sometimes  refuses  to  take  bills 
except  at  a  higher  rate,  which  usually  becomes  the 
official  rate  on  the  following  Thursday.  For  loans 
and  advances  the  Bank  usually  charges  half  per  cent, 
more  than  for  discounting  bills.  When  the  Bank 
is  discounting  bills  at  the  official  rate,  or  making 
advances  at  or  above  it,  Bank  rate  is  said  to  be 
effective,  because  the  Bank  is  then  in  a  position  to 
regulate,  more  or  less,  the  price  of  money  in  London. 


224  THE  MEANING  OF  MONEY 

It  should  be  noted  that  the  official  rate  only 
rules  at  its  head  office,  and  there  only  partially. 
The  Bank  of  England  discounts  at  the  market  rate 
for  private  customers  at  its  head  office  and  also  at 
its  branches ;  in  fact,  according  to  the  frequent 
complaints  of  the  other  banks,  it  competes  with 
them  in  the  country  by  under -cutting  in  the 
matter  of  rates  in  a  manner  which  annoys  them 
seriously,  and  with  some  reason.  Here  again  the 
Bank  has  been  elbowed  into  a  very  difficult  posi- 
tion by  the  force  of  circumstances.  Its  branches 
were  never  a  spontaneous  creation,  but  were 
founded  by  it  largely  in  answer  to  a  demand  for 
them  in  the  country  which  arose  out  of  special  and 
temporary  conditions  ;  now  that  the  industrial  and 
agricultural  centres  have  been  enmeshed  in  a  net- 
work of  banking  facilities,  the  branches  of  the 
Bank  of  England  remain,  and  necessarily  make 
some  exertion  to  justify  their  existence.  Hence 
very  natural  grumbling  on  the  part  of  the  other 
banks,  which  say  that  the  Bank  of  England  takes 
their  money  and  uses  it  to  underbid  them  in  their 
own  territories. 

This  grievance  against  the  Bank  of  England 
brings  into  view  at  once  an  important  quality  of 
the  official  Bank  rate,  namely,  the  fact  that  it  is  in 
normal  times,  seldom  effective.  If  the  Bank  then 
wants  discount  business,  it  has  to  take  bills  at  a 
lower  rate.  If  it  took  bills  in  the  country  only  at 


LACK  OF  CONNECTION  225 

its  official  rate  its  customers,  the  other  banks, 
would  have  no  genuine  cause  of  complaint,  and  the 
Bank  would  get  few  bills,  if  any ;  but  when  it  steps 
off  its  pedestal  and  enters  into  the  chaffering  circle 
of  the  market,  and  chaffers  against  the  market  with 
the  market's  money,  the  market  has  reason  to  feel 
that  it  has  a  grievance. 

This  want  of  connection  between  the  official 
rate  and  the  market  rate  also  has  the  effect  of 
leaving  the  market  rate  wholly  without  regulation. 
The  market  rate,  as  has  already  been  shown,  is  at 
most  times  practically  arrived  at  by  competition 
among  the  other  banks  and  higgling  between  them, 
the  bill-brokers  and  the  sellers  of  the  bills ;  and 
hence  it  follows  that  it  is  ruled  by  mere  hap- 
hazard cross-currents  of  individual  conceptions  on 
the  subject  of  any  particular  business  proposition 
that  may  come  forward,  and  is  not  directed  by  the 
guidance  of  any  consideration  for  the  welfare  of 
the  market  and  of  the  monetary  world  as  a  whole. 
An  individual  banker  or  bill-broker  who  wants  to 
add  to  his  holding  of  bills  or  renew  his  maturities 
naturally  discounts  at  the  best  rate  he  can  get,  and 
cannot  be  expected  to  stop  and  wonder  whether 
his  purchase  at  a  lower  rate  of  discount  will  have 
an  adverse  effect  on  the  foreign  exchanges,  or  give 
some  foreign  financier  too  close  a  hold  on  London's 
store  of  gold.  Hence  it  often  happens  that  we 
read  in  the  money  articles  of  the  newspapers 

Q 


226  THE  MEANING  OF  MONEY 

remarks  expressing  regret  concerning  the  rapidity 
with  which  rates  are  being  allowed  to  decline,  as  if 
the  bankers  and  bill-brokers  were  carrying  out 
some  questionable  and  immoral  transaction,  when 
all  that  they  are  doing  is  to  buy  the  bills  that  they 
want  at  the  only  rate  at  which  the  conditions  allow 
them  to  do  so  :  and  it  must  seem  strange  that  City 
editors  should  shake  their  heads  so  sadly  about  the 
behaviour  of  the  discount  market,  while  they  accept 
a  rise  or  fall  in  Consols  as  due  to  the  inevitable 
action  and  reaction  of  supply  and  demand  in  the 
stock  market. 

The  justification  for  this  attitude  towards  the 
movements  of  the  discount  market  arises  out  of  the 
very  close  connection  which  we  have  already  seen 
to  exist  between  the  market  rate  of  discount  and 
the  foreign  exchanges.  When  the  market  rate  of 
discount  is  allowed  to  fall  relatively  low  in  London, 
bills  of  exchange  are  naturally  sent  here  in  increas- 
ing numbers  from  foreign  countries  to  be  dis- 
counted ;  that  is  to  say,  our  imports  of  securities 
are  stimulated,  and  so  the  balance  of  international 
indebtedness  is  affected,  we  have  more  payments 
to  make  abroad,  and  the  rates  of  exchange  tend  to 
move  towards  the  point  at  which  it  pays  better  to 
ship  gold  than  to  buy  drafts.  The  London  rate  is 
normally  low  when  compared  with  those  of  other 
centres;  but  the  extent  of  its  relative  lowness  is  a 
question  of  degree ;  and  when  this  degree  becomes 


WANT  OF   COHESION  227 

exaggerated  in  a  manner  which  the  general  monetary 
outlook  does  not  seem  to  justify,  a  situation  arises 
which  occasionally  calls  for  deprecating  comment 
by  the  Press,  which  endeavours  to  reflect  the 
judicious  opinion  of  the  City.  The  individual 
bankers  and  brokers,  however,  whose  competition 
depresses  discount  rates,  are  little  deterred  by  these 
considerations ;  in  the  first  place,  because  each  one 
would  think  it  absurd  to  suppose  that  his  individual 
action  would  have  any  appreciable  effect;  in  the 
second,  because  even  if  it  had,  he  would  consider 
that  he  could  not  be  expected  to  refuse  a  fine  parcel 
of  bills  in  order  that  by  holding  out  for  a  higher 
rate  he  might  prevent  an  adverse  movement  in  the 
exchanges.  Adverse  exchanges  make  them  cautious 
in  their  purchases  of  bills  in  their  own  interests, 
because  adverse  exchanges  generally  hold  out  a 
promise  of  higher  rates,  and  so  encourage  buyers 
to  wait.  But  individual  buyers  cannot  be  expected 
to  be  deterred  by  consideration  for  the  interests  of 
the  market  as  a  whole. 

So  once  again  we  arrive  at  the  fact  that  the  store 
of  gold  which  the  Bank  of  England  is  expected  to 
keep  is  constantly  threatened  by  a  mass  of  credit 
created  by  the  other  banks,  which  work  without 
any  immediate  reference  to  the  Bank  of  England's 
position,  but  to  suit  the  requirements  of  their  own 
business.  And  thus  the  beautiful  elasticity  of  our 
monetary  system  leads  to  a  certain  lack  of  cohesion, 


228  THE  MEANING  OF  MONEY 

which  requires,  occasionally,  drastic  measures  by 
the  Bank  of  England  to  correct  it. 

This  lack  of  cohesion  is  a  comparatively  modern 
development,  and  has  arisen  out  of  the  great  growth 
of  the  credit-making  machinery  which  is  outside  of 
the  Bank  of  England,  but  is  loosely  founded  on  its 
reserve,  and  renders  its  reserve  liable  to  attack  by 
every  credit  given  to  a  foreigner,  by  means  of  a 
discount  or  an  advance.  In  Bagehot's  time  the 
power  of  the  Bank  of  England  was  evidently  much 
more  easily  exercised,  and  we  find  him  stating,  in 
the  passage  quoted  on  page  211,  that  in  normal 
times  Lombard  Street  could  not  discount  its  bills 
without  the  help  of  money  provided  by  the  Bank. 
In  other  words,  when  he  wrote,  Bank  rate  was 
always  effective,  save  on  exceptional  occasions. 

So  far  is  this  now  from  being  so,  that  in  order 
to  make  its  rate  effective,  the  Bank  of  England 
often  has  to  borrow  money  that  it  does  not 
want,  because,  the  market  supply  of  money  being 
abundant,  it  knows  that  the  bankers  and  brokers 
wiTTcontinue  to  discount  bills  at  rates  which  will 
keep  the  foreign  exchanges  against  us,  unless  a 
curtailment  of  the  supply  of  money  is  carried  out. 
In  other  words,  the  credit-making  machinery  has 
worked  so  efficiently  in  the  output  of  its  product 
that  the  Bank  of  England,  which  has  to  be  ready 
to  meet  the  liabilities  so  created,  has  to  take  some 
of  the  output  away  from  its  holders,  and  pay  them 


BORROWING  BY  THE  BANK  229 

a  rate  for  restricting  their  temptations  to  take  bills 
at  too  low  rates. 

This  it  does  by  going  into  the  money  market 
and  borrowing.  Any  money  that  it  borrows  can 
only  be  got  back  from  it  by  being  borrowed  again, 
and  it,  of  course,  only  lends,  at  its  head  office,  at  the 
official  rate,  or  i  per  cent,  above  it. 

It  has  already  been  observed  that  when  the 
Bank  of  England  lends  money  the  result  of  the 
operation  is  generally  expressed  in  a  book  entry, 
by  which  it  shows  more  securities  (which  it  has 
received  as  collateral)  among  its  assets,  and  more 
deposits  among  its  liabilities.  When  it  borrows, 
the  book  entry  of  course  works  similarly,  but  con- 
trariwise ;  its  holding  of  securities  is  reduced  by 
the  fact  that  part  of  them  is  pledged  to  the  lenders, 
and  the  amount  that  it  borrows  cancels  so  much 
of  its  liability  under  deposits,  in  other  words,  re- 
duces the  balances  of  the  other  banks,  and  so 
narrows  the  basis  of  credit,  makes  money  dear, 
brings  the  market  rate  of  discount  into  some  con- 
nection with  the  official  rate,  influences  the  foreign 
exchanges,  and  increases  the  probability  that  gold 
will  be  sent  to  London,  or  that  gold  which  arrives 
will  not  be  taken  for  export.  By  this  roundabout 
process  the  Bank  finally  arrives  at  its  object  of 
protecting  or  increasing  its  reserve. 

It  has  been  said  that  by  borrowing  money  the 
Bank  of  England  reduces  the  balances  of  the  other 


230  THE  MEANING   OF  MONEY 

y banks;  this  it  does  either  directly  by  borrowing 
part  of  their  balances  from  them,  or  indirectly,  by 
borrowing  from  the  bill-brokers  and  finance  houses, 
who  pay  it  what  they  lend  with  cheques  on  the 
banks,  which  to  that  extent  cancel  the  balance  of 
the  banks  in  question  at  the  Bank  of  England.  The 
banks  in  question,  having  their  balances  at  the  Bank 
thus  reduced,  either  reduce  the  credits  that  they 
have  based  on  them,  or  more  probably  restore 
their  balances  by  calling  in  money  from  the  bill- 
brokers,  their  loans  to  whom  have  already  been 
described  as  their  second  line  of  defence,  after  their 
holding  of  cash  in  hand  and  at  the  Bank  of  England. 
The  bill-brokers,  from  whom  these  loans  are  called 
in,  first  have  recourse  to  the  other  bankers  and 
money-lenders,  trying  to  fill  the  gap  that  has 
been  made  in  the  funds  on  which  they  work  their 
business,  but  are  finally,  as  it  generally  happens, 
driven  to  the  Bank  of  England,  whence  they  have 
to  borrow  part  of  the  money  that  it  has  borrowed 
from  the  market,  and  will  have  to  pay  for  it  at  or 
over  the  official  rate,  which  is  thus  made  effective, 
and  becomes  a  controlling  factor  in  market  rates. 
The  system  is  thus  clumsy  and  artificial,  and,  as 
has  been  observed,  is  comparatively  novel,  having 
been  brought  into  existence  by  the  great  develop- 
ment of  the  activities  of  the  other  banks,  which 
have  manufactured  credit  so  successfully  that  part 
of  the  output  has  sometimes  to  be  absorbed  by  the 


THE  BILL-BROKERS'   GRIEVANCE      231 

Bank  of  England,  which  does  not  want  it,  but  has 
to  prevent  the  evil  consequences  that  might  result 
from  its  over-abundance. 

The  bill-brokers,  whom  we  have  seen  to  be  the 
first  sufferers  when  the  Bank  of  England  thinks 
it  necessary  to  reduce  the  overgrown  mass  of 
credit,  generally  wax  eloquent  concerning  the 
absurdities  of  the  system,  the  hardship  involved  to 
all  legitimate  users  of  credit  when  it  is  thus  arti- 
ficially controlled,  and  the  monstrous  interference 
with  the  natural  laws  of  supply  and  demand,  which 
ought,  they  contend,  to  be  left  to  regulate  the 
value  of  money  like  that  of  every  other  commodity. 

Their  position  is  certainly  one  with  which  a 
disinterested  observer  can  readily  sympathize,  for 
they  are  constantly  tempted,  not  to  say  forced,  by 
the  free  credit  facilities  given  by  the  other  banks, 
into  taking  bills  at  rates  which  have  an  adverse 
effect  on  the  foreign  exchanges ;  and  then  the  Bank 
of  England,  in  order  to  rectify  the  position,  has  to 
reduce  the  mass  of  credit,  and  the  bill-brokers  find 
themselves,  with  their  portfolios  full  of  bills  taken 
at  low  rates,  artificially  deprived  of  the  wherewithal 
to  carry  them,  and  obliged  to  pay  an  unexpectedly 
high  price  for  money  to  finance  their  bills,  or 
rediscount  them  with  the  Bank  of  England  at  a  loss. 

Nevertheless  their  appeal  to  economic  first 
principles,  and  the  natural  laws  of  supply  and 
demand,  does  not  seem  to  bear  examination.  Even 


232  THE  MEANING  OF  MONEY 

in  the  production  of  agricultural  and  industrial 
commodities  the  law  of  supply  and  demand,  if  left 
unfettered,  brings  many  evils  in  its  train,  the  most 
obvious  among  which  are  the  periodical  spells  of 
exuberance  and  depression  to  which  the  producing 
industries  are  habitually  exposed,  to  their  own  loss 
and  that  of  the  community  as  a  whole.  For  some 
time  past  the  civilized  world  has  submitted  to  these 
evils  as  inevitable  or  as  small  in  comparison  with 
the  great  benefit  arising  from  the  increase  in  pro- 
duction that  has  taken  place  under  the  system  of 
unrestricted  competition  ;  but  there  are  very  plain 
indications  that  this  acquiescent  attitude  is  being 
modified.  The  modern  trend  of  production  is  cer- 
tainly in  the  direction  of  co-ordination,  co-operation, 
combination,  and  regulation,  and  unrestricted  com- 
petition seems  to  be  gradually  retiring  into  the 
obscurity  of  obsolescence. 

But  in  this  matter  of  the  supply  of  credit  and 
of  credit  instruments  it  has  long  been  recognized 
that  regulation  is  essential,  and  that  the  free 
play  of  supply  and  demand  cannot  be  left  to  itself, 
because  of  the  vast  and  wide-spreading  disasters 
that  result  to  the  whole  of  a  community  from  any 
dislocation  in  the  machinery  of  credit.  Moreover, 
it  must  be  remembered  that  supply  and  demand 
cannot  possibly  work  as  effectively  in  the  case  of 
money  as  in  that  of  an  ordinary  commodity,  because 
of  an  important  and  essential  difference  which  sets 


THE  COST  OF  PRODUCTION          233 

a  great  gulf  between  money,  in  the  modern  English 
sense,  and  concrete  and  tangible  commodities. 
This  difference  lies  in  the  fact  that  the  cost  of  pro- 
duction of  money  is  a  negligible  factor  in  its  price. 
If  the  farmer  is  bid  £1000  for  his  crop,  his  answer 
will  be  strongly  influenced  by  the  amount  of  work 
and  capital  that  have  been  spent  on  producing  it, 
and  will  be  required  for  producing  another ;  when  a 
banker  is  bid  4  per  cent,  for  a  loan  of  £1000  for  six 
months,  in  other  words,  is  offered  £1020  six  months 
hence  for  £1000  to-day,  the  sum  that  it  will  have 
cost  him  or  somebody  else  to  produce  that  £1000 
will  hardly  enter  into  his  calculation ;  for  it  will  be 
merely  a  matter  of  cheque  drawing  and  book  entries 
involving  a  certain  amount  of  penmanship,  and 
whether  the  loan  is  for  £1000  or  £1,000,000  will 
make  little  difference — very  likely  none  at  all — to 
the  cost  involved  to  the  producer  of  it.  It  was  quite 
otherwise  when  money  consisted  of  metal  that  had 
to  be  dug  out  and  treated ;  but  now  that  money  is 
a  matter  of  book  entries  and  pieces  of  paper,  which 
pass  current  because  they  are  convertible  into  gold 
and  so  have  to  have  a  certain  amount  of  gold  behind 
them — but  are  brought  into  being  according  to  the 
varying  views  of  bankers,  as  to  how  much  may  safely 
be  based  on  a  given  quantity  of  gold — the  supply  of 
money  can  obviously  be  multiplied  without  any  ques- 
tion of  cost,  so  long  as  borrowers  have  security  to 
offer,  and  bankers  are  prepared  to  make  book  entries. 


234  THE  MEANING  OF  MONEY 

Regulation  is  in  fact  already  an  accepted  part  of 
our  monetary  system,  and  we  have  seen  that  the 
Bank  Charter  Act  carefully  and  precisely  regulated 
the  number  of  bank-notes  that  might  be  created.  If 
the  bank-note  had  retained  its  position  as  the  most 
important  of  our  credit  instruments,  Bank  rate 
would  have  retained  its  control  of  the  money 
market,  that  is  to  say,  the  rate  at  which  the  Bank  of 
England  was  prepared  to  provide  borrowers  with 
notes  would  have  remained  the  dominant  factor  in 
the  price  of  money.  But  we  have  seen  that  the 
regulation  arranged  by  the  Bank  Act  has  been  set 
aside  by  the  development  of  the  use  of  cheques,  and 
the  dominant  factor  in  the  price  of  money  is  now 
the  rate  at  which  the  other  banks  are  prepared  to 
provide  borrowers  with  the  right  to  draw  cheques. 

Hence  it  is  that  the  Bank  of  England,  which  is 
expected  to  keep  a  gold  reserve  for  the  whole 
economic  body,  English  and  foreign,  whence  any 
one  who  has  a  cheque  on  England  can  help  himself 
at  a  moment's  notice,  is  only  in  exceptional  cir- 
cumstances able  to  regulate  the  supply  of  credit 
which  is  based  on  its  reserve. 

These  exceptional  circumstances  arise  (i)  when 
trade  is  so  active  that  the  lending  power  of  the  other 
banks  has  reached  its  limit,  and  so  any  more  credit 
required  has  to  be  provided  by  the  Bank  of  England, 
at  its  price,  and  so  Bank  rate  is  effective ;  (2)  when 
the  payment  of  the  direct  taxes  in  the  January  to 


WHEN  BANK  RATE   IS  EFFECTIVE    235 

March  quarter  sweeps  millions  into  the  Treasury's 
account  at  the  Bank  of  England,  which  thus  obtains 
control  of  the  position ;  (3)  at  the  end  of  the  quarters, 
when  the  demand  for  credit  and  currency  generally 
exceeds  the  outside  supply,  and  the  Bank  of  England 
has  to  fill  the  gap  on  its  own  terms ;  and  (4)  when 
the  Bank  of  England  decides  that  the  conditions  of 
the  international  money  market  make  regulation 
imperative,  and  so  borrows  money  that  it  does  not 
want  in  order  to  curtail  the  mass  of  credit  created 
by  the  other  banks,  and  force  discount  rates  up  to 
a  point  at  which  they  will  have  the  desired  effect  on 
the  foreign  exchanges. 

In  times  of  crisis  or  of  strong  external  demand  for 
gold  it  need  not  be  said  that  the  Bank  of  England 
holds  control  either  because  it  has  taken  measures 
to  get  it,  or  because  the  demand  for  credit  has 
reached  the  limit  of  the  outside  supply,  or  the 
exports  of  gold  have  narrowed  the  basis  of  the 
outside  supply.  The  weak  point  in  the  system 
is  that  in  ordinary  times,  and  especially  when  the 
price  of  money  is  declining,  the  Bank  has  no  control 
of  the  position;  the  credit  factory  of  the  other 
banks  works  away  merrily  and  unregulated,  pro- 
bably rather  too  fast,  and  perhaps  laying  up  trouble 
for  the  next  spell  of  depression ;  and  in  the  meantime 
the  Bank's  task  of  increasing  its  reserve  with  a  view 
to  this  next  spell  of  depression  is  rendered  difficult 
or  impossible,  because  it  has  no  voice  in  the  value 


236  THE  MEANING  OF  MONEY 

of  money,  which  regulates  the  discount  rate,  which 
rules  the  exchanges. 

An  interesting  example  of  the  working  of  this 
weakness  in  our  system  was  afforded  in  the  summer 
of  1908.  Every  one  who  has  followed  the  recent 
events  of  monetary  history,  knows  that  for  some 
years  the  abnormal  activity  of  trade  and  other 
influences  had  caused  chronic  monetary  stringency, 
which  culminated  in  the  American  crisis  of  1907. 
This  eruption  effectively  checked  the  abnormal 
activity  of  trade,  and  monetary  stringency  gave 
place  to  abundance.  The  Bank  of  England,  which 
had  stood  in  the  breach  in  defence  of  the  economic 
world  during  the  crisis,  and  by  raising  its  rate  had 
drawn  in  gold  from  seventeen  different  countries 
to  supply  America's  needs,  led  the  way  in  recog- 
nizing the  change  in  the  position,  and  reduced  its 
rate  rapidly  from  7  to  2^  per  cent,  during  the  spring 
of  1908,  thus  allowing  other  centres,  whose  reserves 
had  been  depleted  during  the  crisis,  to  replenish 
them  out  of  the  gold  which  arrives  regularly  in 
London  from  South  Africa  and  elsewhere.  This 
was  the  obviously  wise  and  sensible  policy,  but  after 
it  had  been  carried  out  it  might  have  been  thought 
that  the  next  step  was  to  set  about  securing  that 
increase  in  the  Bank's  gold  store  which  had  long 
been  urged  as  desirable,  and  was  then  rendered 
possible  by  the  great  change  that  had  come  over 
the  money  market's  position. 


A  WEAKNESS   EXEMPLIFIED          237 

Whether  the  Bank  Court  did  or  did  not  desire 
to  do  so,  is  known  only  to  itself;  it  may  have  had 
information  which  led  it  to  believe  that  monetary 
prospects  promised  continued  ease,  and  that  there 
was  no  need  to  regret  the  course  of  events.  But 
the  point  to  be  noted  is  that  even  if  the  Bank  had 
wished  to  increase  its  gold  store,  it  would  have  been 
impossible  for  it  to  do  so,  unless  it  had  intervened 
and  borrowed  a  very  large  amount  from  the  market ; 
and  this  is  a  weapon  of  which  it  naturally  only 
makes  use  when  the  outlook  makes  its  employment 
imperative. 

Bank  rate  was  still  2^  per  cent,  but  it  was  wholly 
ineffective  and  an  empty  symbol.  The  market  rate  was 
of  course  the  rate  at  which  the  business  was  done, 
and  its  low  level  had  the  inevitable  effect  of  sending 
a  mass  of  bills  to  be  discounted  here,  and  of  pre- 
venting foreign  holders  of  English  bills  from  renew- 
ing them  as  they  fell  due,  much  less  increasing  their 
purchases  of  them.  And  so  England's  imports  of 
securities  were  stimulated  to  a  point  at  which  it 
had  to  send  gold  continually  to  the  Continent,  instead 
of  using  it  to  build  up  the  reserve. 

And  this  happened  largely  owing  to  the  want  of 
connection,  in  times  of  monetary  ease,  between  the 
official  rate  and  the  market  rate.  The  only  con- 
nection that  exists  between  them  arises  because  the 
rate  which  bankers  allow  to  depositors  is  more  or 
less  regulated  by  Bank  rate,  and  is  usually  i£  per 


238  THE  MEANING  OF  MONEY 

cent,  below  it.  It  might  be  supposed  that  this  con- 
nection would  suffice  to  establish  some  relation 
between  the  Bank  rate  and  the  market  rate  of  dis- 
count, because  it  would  be  natural  to  infer  that  the 
bankers  would  expect  to  make  some  profit  between 
their  depositors  and  their  borrowers ;  if  that  were 
so  it  would  follow  that  the  rate  at  which  they  would 
lend  to  the  bill-brokers  could  not  fall  much  lower 
than  i  per  cent,  below  Bank  rate,  and  that  the 
market  discount  rate  would  thus  be  kept  more  or 
less  approximately  in  touch  with  the  official  rate. 
But  this  expectation  is  not  borne  out  in  practice, 
because  the  large  amounts  of  credit  *  that  the  banks 
handle,  besides  those  which  are  represented  by  sums 
definitely  placed  on  deposit,  make  the  deposit  rate 
a  factor  in  part  only  of  their  business.  The  principle 
on  which  they  seem  to  work  is  the  theory  that  it  is 
better  to  get  some  sort  of  rate  than  none,  and  each 
one  considers  that  if  it  refuses  to  lend  to  the  bill- 
brokers  at  the  rates  which  are  supposed  to  be 
current,  its  neighbours  will  only  get  all  the  more 
business ;  and  so  in  times  of  monetary  ease,  com- 
petition and  rivalry  deliver  the  bankers  into  the 
hands  of  the  bill-brokers,  who  get  money  out  of 
them  on  merely  nominal  terms,  and  then  proceed 
to  discount  bills  at  rates  which  are  unwholesome 
for  the  foreign  exchanges. 

So,   to    return    to    our    example,    the    system 
•  P.  124. 


THE  CHAIN  OF  CAUSATION  239 

workec  in  July,  1908,  when  Bank  rate  was  2^  per 
cent,  the  rate  allowed  by  bankers  to  depositors 
was  i  per  cent.,  the  rate  at  which  bankers  were 
lending  to  bill-brokers  was  i  per  cent.,  the  market 
rate  of  discount  was  i^  per  cent,  the  foreign  ex- 
changes were  adverse,  and  all  the  gold  that  came 
into  London  from  the  mines  of  Johannesburg 
went  on  to  Paris  or  Berlin.  It  went  to  Paris 
because  the  low  level  of  discount  rate  here  made  it 
unprofitable  for  French  banks  to  renew  the  English 
bills  that  they  held,  and  so  gold  went  to  pay  for 
them  as  they  were  presented,  and  it  went  to  Berlin 
because  the  low  level  of  discount  rates  here  enabled 
Berlin  to  pour  bills — much  of  them  mere  finance 
paper — into  this  market  to  be  discounted,  and  gold 
went  to  pay  for  these  imported  securities. 

We  thus  see  in  this  example  the  direct  chain 
of  causation  between  the  competition  and  rivalry 
among  the  banks,  which  incite  them  to  lend  money 
to  bill-brokers  at,  or  sometimes  below,  the  rate  at 
which  they  borrow  it  from   depositors,   and  the 
consequent  inability  of  the   Bank  of  England  to 
increase  its  reserve,  because  the  operations  of  the 
other  banks  drive  gold  abroad.     This  result  of  their  / 
competition  and  rivalry,  besides  being  injurious  to 
the  wider  interests  of  the  money  market,  is  unprofit-\ 
able  to  the  banks.    If  we  could  for  a  moment  imagine   \ 
that  they  could  lay  aside  their  rivalries  and  make  a    1 
mutual  arrangement  by  which  they  agreed  not  to/ 


240  THE  MEANING  OF  MONEY 

'*. 

lend  money  to  bill-brokers  or  anybody  else  at  a 
lower  rate  than  £  per  cent,  above  that  which  they 
are  giving  to  their  depositors,  it  is  probable  that 
the  amount  that  they  would  lend  would  be  reduced; 
but,  on  the  other  hand,  the  rate  that  they  would 
receive  on  the  sums  lent  would  be  very  materially 
increased. 

The  result  would  be  that  they  would  make  less 
credit  in  times  of  ease,  and  in  times  of  ease  the 
superfluity  of  manufactured  credit  is  a  dangerous 
temptation  to  speculators  and  kite-flyers — so  much 
so  that  it  has  been  observed  by  a  seasoned  and 
exceptionally  well-placed  watcher  of  the  money 
market  that  "  bad  debts  are  made  when  money  is 
cheap";  the. banks'  proportion  of  cash  to  liabilities 
would  be  higher,  and  their  position  would  be 
stronger;  their  profits  would  be  greater  or  no 
less,  and  the  connecting  link  between  Bank  rate 
and  the  market  rate  would  be  established  to  an 
extent  which  would  still  permit  of  all  desirable 
elasticity,  but  would  provide  a  minimum  beyond 
which  the  divorce  between  the  two  would  prob- 
ably not  be  stretched.  For  the  market  rate  of  dis- 
co~unt,  as  has  been  shown,  depends  to  a  considerable 
extent  on  the  current  rate  for  loans  from  the  banks 
to  the  bill-brokers. 

Whether  such  an  agreement  is  possible  is  another 
question.  But  the  fact  that  a  considerable  number 
of  the  banks  already  work  by  mutual  agreement  in 


AN   ELASTIC  LINK  241 

deciding  on  the  rate  at  which  they  will  lend  money 
to  their  Stock  Exchange  clients  is  in  favour  of  the 
possibility.  And  since  the  bankers  already  to  some 
extent  regulate  the  rate  that  they  allow  to  de- 
positors by  Bank  rate,  such  an  arrangement  as 
is  here  suggested  would  introduce  no  new  prin- 
ciple and  effect  no  revolution,  but  merely  carry  the 
application  of  an  established  principle  a  step  further. 

It  would  bring  the  Bank  rate  and  the  market  rate 
into  touch,  yet  quite  distantly  and  elastically,  and 
without  establishing  any  cast-iron  link  between 
them.  And  it  would  enable  Bank  rate  to  work,  not 
as  now,  with  the  assistance  of  artificial  and  expen- 
sive measures  that  have  suddenly  to  be  decided  on 
and  executed  by  the  Bank  of  England,  and  upset 
calculations,  and  cause  inconvenience  and  irritation, 
but  by  a  continuous  and  normal  relation  between  it 
and  the  lowest  price  at  which  credit  is  available  in 
the  market. 

Under  such  circumstances  the  other  banks 
might  fairly  claim  to  have  a  more  definite  influence 
on  the  movements  in  Bank  rate ;  and  any  process 
which  would  lead  to  closer  co-operation  between 
them  and  the  Bank  of  England  would  be  a  gain. 


CHAPTER  XIII 

THE   BANK  RETURN 

THE  account  issued  every  Thursday  by  the  Bank 
of  England,  giving  a  statement  of  its  position,  is 
generally  regarded  as  the  key  to  the  condition  of  the 
London  money  market  as  a  whole  and  is  so  awaited 
and  examined  with  keen  interest.  Much  ingenuity 
is  often  required  in  unravelling  the  meaning  of 
the  movements  in  the  various  items,  for  the 
return,  which  is  drawn  up  in  accordance  with 
the  requirements  of  the  Bank  Charter  Act,  is 
by  no  means  a  model  of  lucidity.  And  some 
attempt  at  comprehension  of  the  return  is  so 
essential  to  those  who  wish  to  grope  their  way 
through  the  mysteries  of  the  money  market,  that 
we  must  now  try  to  arrive  at  some  sort  of  distant 
acquaintance  with  it.  Further  than  that  we  need 
not  expect  to  go.  It  may  be  said  of  all  balance- 
sheets  that  they  are  useful  as  a  general  indication, 
but  apt  to  be  misleading  if  used  as  a  basis  of  detailed 
inferences,  except  by  those  who  can  go  behind  the 


THE  DOUBLE  ACCOUNT  243 

figures  and  find  out  what  they  really  mean.  In  the 
case  of  the  Bank  return,  which  may  be  said  to  be  a 
balance-sheet  of  a  kind,  only  the  broadest  and  most 
guarded  deductions  are  possible,  and  they  should 
be  accepted  with  caution.  Parliamentary  wisdom, 
expressed  in  the  Bank  Act,  decreed  that  the  note- 
issuing  business  of  the  Bank  should  be  separated 
from  its  banking  business,  and  that  this  separation 
should  be  shown  in  its  weekly  account,  which  gives 
two  separate  statements,  one  showing  the  position 
of  the  Issue  Department,  the  other  that,  of  the 
Banking  Department.  It  has  frequently  been  sug- 
gested that  this  distinction  is  unreal  and  only 
darkens  counsel,  and  that  the  Bank  return  would 
be  clearer  and  simpler  if  the  two  statements  were 
put  together.  There  is  something  to  be  said  for 
this  view,  but  perhaps  hardly  enough  to  justify  an 
alteration  which  would  change  the  face  of  the 
return  so  completely  and  confuse  comparisons 
with  its  predecessors  of  the  past  sixty  odd  years. 
Overleaf  is  a  specimen  of  the  account  as  now  pre- 
sented. Its  figures  are  influenced  by  its  being  the 
last  return  of  a  half-year,  so  that  the  Other  Deposits 
and  Other  Securities  are  increased  by  the  Bank's 
provision  of  emergency  credit.  But  it  will  serve  as 
an  illustration : — 


244 


THE  MEANING  OF  MONEY 


BANK  OF  ENGLAND. 

AN  ACCOUNT  pursuant  to  the  Act  7  and  8  VICT.  cap.  32,  for 
the  week  ending  on  Wednesday,  the  ist  day  of  July,  1908. 


ISSUE  DEPARTMENT. 


£tN 


Notes  Issued 


55,484,385 


^55,484,385 


Government  Debt 
Other  Securities  ..       7,434,9°°j> 
Gold  Coin  &  Bullion    37,034,38$ 
Silver  Bullion 

j£5  5,484,385 


Dated  the  2nd  day  of  July,  1908. 

J.  G.  NAIRNE,  Chief  Cashier. 

BANKING  DEPARTMENT. 
£ 


/ 


Capital    14,553,000 
Rest          ..         -       3,2H,385 
Public  Deposits— 
(including 
chequer,  Savings 
Banks,  Commis- 
sioners   of    Na- 
tional Debt,  and 
Dividend 

>  counts)  ^  7>--r-»— - 

Other  Deposits  '  ":';  '  5V97,o83 
Seven  -  Day     and 
•  other  Bills        ..  48,244 

Ae*»ww 


9,648,021 


^78,660,713 


Government  Secur- 
ities ..  ..  15,231,766  ',',.  l 

Other  Securities  ..  36,347,*    . 

Notes        ..         ..  25,508,120 

Gold  and  Silver 
Coin  ..  ..  I,573,oo8 


£78,660,713 


Dated  the  2nd  day  of  July,  1908. 

J.  G.  NAIRNE,  Chief  Cashier. 


THE  ISSUE   DEPARTMENT  245 

On  the  left  or  debit  side  of  the  statement  of  the 
Issue  Department  we  find  one  item,  that  of  its 
notes  issued  and  outstanding,  and  it  must  be  care- 
fully observed  that  their  amount  is  not  that  of  the 
Bank's  note  circulation,  because  a  large  proportion 
is  retained  among  the  assets  of  the  Banking 
Department,  and  constitutes  most  of  what  is  gene- 
rally called  the  Bank's  reserve.  The  Bank's  note 
circulation  is  arrived  at  by  subtracting  the  notes 
held  by  the  Banking  Department  from  those  issued 
by  the  Issue  Department,  by  which  process  we 
arrive  at  the  amount  of  notes  that  are  circulating 
at  home  and  abroad  or  are  held  by  the  other  banks 
to  meet  daily  demands  for  cash. 

On  the  other  side  of  the  dividing  line  that 
separates  the  assets  and  liabilities  of  the  Issue 
Department  appear  the  items  on  which  the  bank- 
notes are  secured.  First  comes  the  Government 
debt,  swollen  to  over  n  millions  from  the  £1,200,000 
to  advance  which  to  Dutch  William  the  Bank  was 
originally  founded ;  this  is  not  represented  by  any 
holding  of  stock,  but  is  a  book  entry  between 
the  Government  and  the  Bank,  and  this  item  should 
be  noted,  because  one  of  the  suggestions  made  for 
the  creation  of  bigger  gold  reserves  advocates  that 
the  Government  should  pay  this  debt  to  the  Bank 
in  gold  and  that  the  Bank's  fiduciary  note  issue 
should  thus  be  permanently  reduced.  The  fiduciary 
(confidential)  issue  is  that  part  of  the  issue  that  is 


246  THE  MEANING  OF  MONEY 

based  not  on  gold  but  on  this  Government  debt 
and  the  next  item,  Other  Securities,  which  consist 
of  British  Government  stocks ;  these  two  aggregate 
nearly  i8£  millions,  and  this  figure  is  at  present 
the  limit  up  to  which  the  Bank  is  allowed  to  issue 
notes  against  securities.  It  was  arrived  at  by  the 
provision  in  the  Bank  Act  which  fixed  the  fiduciary 
issue  at  14  millions,  and  arranged  that  the  Bank 
should  be  permitted  to  take  over  two-thirds  of  the 
authorized  powers  of  any  country  bank  which 
thereafter  might  allow  its  note  issue  to  lapse.  By 
means  of  these  lapses,  which  arose  chiefly  owing 
to  the  absorption  of  country  banks  by  companies 
which  had  London  offices  and  therefore  were 
debarred  from  note  issuing  by  the  Bank  of 
England's  monopoly,  the  fiduciary  issue  has  grown 
from  the  14  millions  at  which  it  was  fixed  by  the 
Bank  Act  to  the  i8£  millions  now  shown. 

Above  this  limit  every  note  must  have  a  bullion 
basis,  and  is  as  a  matter  of  practice  invariably  based 
on  gold.  The  Bank  Act,  however,  allows  one-fifth 
of  the  metallic  basis  of  the  note  issue  to  consist  of 
silver,  and  the  weekly  account  as  published  by  the 
Bank  of  England  regularly  contains  the  line  "  Silver 
coin  and  bullion  "  with  a  blank  opposite  to  it.  This 
power  possessed  by  the  Bank  of  basing  part  of  its 
note  issue  on  silver  is  often  forgotten,  but  its 
existence  was  brought  home  to  the  City  in  1897 
when  the  Chancellor  of  the  Exchequer  and  the 


SILVER  AND  THE  BANK  NOTE       247 

Governor  of  the  Bank  seriously  discussed  a  pro- 
posal for  putting  it  into  practice.  The  arrangement 
was  evidently  due  to  pressure  brought  to  bear 
on  the  Government  of  the  day  by  the  Bimetallists, 
who  believed  that  silver  and  gold  could  be  made 
to  circulate  on  equal  terms  at  a  fixed  ratio,  to  the 
benefit  of  all  concerned,  and  this  mooted  concession 
on  the  part  of  the  Bank  of  England  was  part  of  a 
scheme  for  improving  the  position  of  silver.  But 
it  was  nipped  in  the  bud  very  early  in  its  history. 
The  Times  found  out  what  was  afoot  and  exposed 
the  scheme  with  dramatic  effect.  There  was  such 
an  outcry  in  the  City  that  no  more  was  heard  of 
the  project,  and  gold  remains  the  sole  basis  of  every 
note  that  is  issued  by  the  Bank  above  the  18^ 
million  limit. 

Proceeding  to  the  Banking  Department,  the  first 
item  that  we  see  on  the  liabilities  side  is  the  pro- 
prietors' capital,  which  speaks  for  itself,  being 
obviously  the  amount  subscribed  by  the  original 
stockholders  of  the  Bank,  with  subsequent  additions. 
It  differs  from  the  capital  of  the  other  English 
banks  by  being  in  stock  instead  of  shares,  and  by 
being  fully  paid  up,  whereas  it  is  now  the  fashion 
for  banks  to  have  a  reserve  in  the  shape  of  a  liability 
on  their  shareholders  for  uncalled  capital.  But 
though  the  stock  of  the  Bank  of  England  is  fully 
paid,  authorities  differ  as  to  whether  there  is 
further  liability  on  it.  It  is  not  a  practical  question, 


248  "        THE  MEANING  OF  MONEY 

however,  or  one  that  need  keep  proprietors  of 
Bank  stock  awake  at  night,  and  Parliament  has 
distinguished  the  stock  by  including  it  among  the 
investments  open  to  trustees. 

The  next  item  is  the  Rest,  under  which  quaint 
name  the  Bank  holds  what  most  other  banks  and 
companies,  which  are  fortunate  enough  to  possess 
one,  call  a  reserve.  That  is,  it  is  an  accumulation 
of  profits  which  have  not  been  distributed  as 
dividends  but  kept  in  hand  to  strengthen  the  Bank's 
position.  It  may  seem  at  first  sight  puzzling  that 
the  possession  of  a  liability  should  strengthen  a 
company's  position,  but  this  liability,  like  the  sub- 
scribed capital,  is  a  liability  only  between  the  Bank 
and  its  shareholders,  and  is,  of  course,  represented 
by  assets  on  the  other  side  of  the  account,  so  that 
the  proportion  of  assets  to  real  outside  liabilities — 
the  demands  that  the  Bank's  customers  can  make 
on  it— is  strengthened  by  its  existence.  Unlike  the 
reserve  of  an  ordinary  bank  or  company,  however, 
the  Bank  of  England's  Rest  constantly  fluctuates, 
and  it  may  be  supposed  that  it  more  or  less  contains 
the  Bank's  profit  and  loss  account  balance.  But  it 
is  shifted  about  from  week  to  week  in  a  manner 
which  an  outside  observer  can  note,  but  not  under- 
stand, and  apparently  most  of  the  profit  and  loss 
balance  is  included  in  the  Other  Deposits,  which  will 
be  dealt  with  later,  and  is  transferred  to  the  Rest 
when  it  is  wanted  to  pay  dividends  withal.  At  any 


THE  REST  249 

rate,  it  is  not  unusual  to  see  a  large  amount  sud- 
denly added  to  the  Rest  at  the  end  of  February  and 
August  when  the  Bank  completes  its  half-year,  and 
from  the  amount  of  the  Rest  at  those  dates  it  is 
possible  to  calculate  what  the  distribution  will  be 
when  the  Bank  Court  assembles  for  the  "making 
of  a  dividend."  For s  the  Rest  is  never  allowed  to 
fall  below  3  millions,  and  the  amount  above  that 
level  at  the  end  of  the  half-year  is  roughly  the  sum 
available  for  distribution.  It  may  be  noted  that 
this  three-million  level  of  the  Rest  has  been  constant 
during  many  decades,  and  has  not  been  increased 
in  accordance  with  the  addition  to  the  Bank's  out- 
side liabilities.  Bagehot's  "  Lombard  Street "  gives 
the  Bank  return  for  the  last  week  of  1869  with  the 
Rest  just  over  3  millions  and  the  Other  Deposits 
at  1 8  millions  odd.  At  the  end  of  June,  1908,  the 
Rest  is  still  just  over  3  millions,  and  the  Other 
Deposits  are  51  millions  odd. 

The  Public  Deposits  are  the  balances  of  the 
various  departments  of  the  British  Government, 
which  are  held  and  administered  by  the  Bank  of 
England  as  its  banker.  They  fluctuate  according 
to  the  briskness  or  sluggishness  of  the  revenue 
payments,  and  the  rapidity  or  slowness  with  which 
the  Government  is  making  its  various  disburse- 
ments. A  large  sum  is  taken  off  them  at  the  be- 
ginning of  every  quarter,  when  the  dividends  on 
Consols  and  other  Government  stocks  are  paid,  and 


250  «        THE  MEANING  OF  MONEY 

this  sum  is  transferred  to  the  Other  Deposits,  or 
ultimately  finds  its  way  there.  The  payment  of  the 
Government  dividends  thus  tends  to  make  money 
abundant,  for  it  means  that  a  credit  at  the  Bank  of 
England  has  been  taken  from  the  Treasury  and 
turned  into  "cash  in  hand  and  at  the  Bank  of  Eng- 
land" in  the  control  of  the  other  banks,  who  can  use 
it  as  the  basis  for  the  manufacture  of  more  credit. 
On  the  other  hand  in  the  March  quarter  of  the  year, 
when  we  are  all  paying  our  income-tax  and  house- 
duty,  the  Public  Deposits  swell,  the  Other  Deposits 
dwindle,  and  money  becomes  scarce,  or  "tight"  in 
the  City  phrase.  It  is  important  to  remember 
that  an  increase  in  the  Public  Deposits  means 
an  increase  of  credits  over  which  the  Bank 
v  keeps  command  and  control,  but  an  increase 
in  the  Other  Deposits  means  an  increase  in  its 
liabilities  to  the  general  public  and  in  the  "cash 
V  at^the  Bank  of  England"  which  is  used,  like  gold 
or  notes,  as  a  basis  for  credit-making  by  the  other 
banks.  It  thus  follows  that  when  the  payment 
of  the  direct  taxes  in  the  March  quarter  swells  the 
Public  Deposits  at  the  expense  of  the  Other,  by 
the  transfer  of  credits  from  the  taxpayers  to  the 
Treasury,  the  other  banks,  in  order  to  maintain 
their  balances  at  the  Bank  of  England,  have  to  call 
V  in  funds  that  they  have  lent.  They  accordingly 
j  reduce  their  loans  at  call  or  short  notice  with  the 
/  bill-brokers,  and  the  latter  in  order  to  fill  the  gap 


TAXES  AND  THE  MONEY  MARKET     251 

generally  have  to  borrow  from  the  Bank  of  England 
and  so  restore  the  basis  of  credit  by  producing 
fresh  supplies  of  cash  at  the  Bank  of  England, 
which  take  the  place  of  those  which  the  tax-1 
gatherer's  activity  has  transferred  from  the  banks' 
to  the  Government's  balance.  The  bill-brokers, 
being  thus  the  chief  sufferers  from  this  seasonal 
stringency,  cry  out  with  great  vigour  upon  the 
iniquities  of  a  system  which  thus  locks  up  the 
money  of  the  tax-payer  in  the  control  of  the  Bank 
of  England,  which  will  only  lend  at  a  rate  which  is 
normally  higher  than  that  current  in  the  market; 
and  they  maintain  that  trade  is  thus  penalized  and 
the  clock  of  economic  progress  put  back,  and  that 
it  is  necessary  to  adopt  measures  for  a  radical 
alteration  in  the  whole  arrangement,  by  which  the 
big  balance  accumulated  by  the  Treasury  in  the 
March  quarter  should  not  be  retained  by  the  Bank 
of  England,  but  distributed  among  the  other  banks, 
which  would  be  prepared  to  lend  at  the  market 
rate.  In  all  these  objections  there  is  a  certain 
amount  of  reason,  but  they  are  overwhelmingly 
answered  by  the  practical  fact  that  this  normal 
tightness  of  money  in  the  March  quarter  gives  the. 
Bank  of  England  a  much-needed  opportunity  of 
replenishing  its  reserve  against  the  demands  of  the 
latter  half  of  the  year.  If  the  Bank  rate  and  market 
rate  were  kept  normally  in  closer  touch  there  would  . 
be  no  need  for  the  Bank  to  take  advantage  of  the 


252  -        THE  MEANING  OF  MONEY 

period  of  tax-gathering  and  tightness  in  order  to 
strengthen  itself.  And  then  it  might  be  possible 
to  discuss  measures  for  relieving  this  spring-tide 
strain  on  the  bill-brokers,  not  by  such  revolutionary 
means  as  they  are  fond  of  suggesting,  but  by 
modifying  the  system  under  which  the  bulk  of  the 
direct  taxes  are  paid  in  the  last  quarter  of  the  finan- 
cial year,  and  perhaps  by  accelerating  the  rapidity 
with  which  the  tax-gathered  money  is  paid  out  again 
by  the  Treasury.  But  as  things  are  at  present,  the 
long  period  of  control  of  the  position  which  is 
secured  to  the  Bank  by  the  transfer  of  taxes  to  the 
Public  Deposits,  gives  it  its  only  chance  of  strength- 
ening itself  except  by  the  adoption  of  borrowing 
measures  to  which  it  is  naturally  reluctant  to  resort. 
"Other  Deposits"  is  the  comprehensive  title 
under  which  the  Bank  includes  all  its  liability  on 
deposits  to  any  one  but  the  British  Government. 
Within  this  item  is  locked  up  the  secret  of  the  real 
position  of  the  money  market,  for  it  contains  the 
balances  of  the  other  banks,  and  as  the  Other  De- 
posits rise  and  fall  it  is  fairly  safe  to  expect  that 
that  part  of  the  basis  of  credit  which  consists  of 
the  cash  at  the  Bank  of  England  which  they  show 
in  their  balance-sheets  also  expands  and  contracts. 
This  expectation  is  fairly  safe,  but  it  must  be  re- 
membered that  the  Other  Deposits  contain  many 
other  accounts  besides  those  of  the  banks.  It  is 
generally  believed  in  banking  circles  that  the 


THE  OTHER  DEPOSITS  253 

average  amount  of  the  bankers'  balances  is  22  to  23 
millions.  In  the  return  given  on  page  244  they  were 
probably  swollen  by  the  usual  proceedings  at  the 
end  of  the  half-year.  But  perhaps  about  20  millions 
consisted  of  liabilities  to  other  creditors,  including 
governments,  municipalities,  and  the  Bank's  many 
private  customers.  It  thus  follows  that  the  really 
interesting  movements  that  take  place  in  the  books 
of  the  Bank  of  England  are  hidden  from  the  public 
gaze,  for  they  are  transfers  to  and  from  the  various 
accounts  which  are  included  in  the  Other  Deposits, 
and  therefore  do  not  affect  their  total.  And  hence  it 
is  that  the  Bank  return,  though  in  some  senses  a 
very  full  statement  of  the  Bank's  position,  is  only  a 
tantalizing  indication  of  the  outside  of  things,  of 
which  monetary  students  crave  hungrily  for  details. 
It  is  often  suggested  that  more  light  should  be 
thrown  on  the  position  by  the  separation  of  the 
bankers'  balances,  in  the  weekly  return,  from  those 
of  the  Bank  of  England's  other  customers.  This 
demand  for  more  light  is  attractive,  but  extreme 
caution  is  desirable  in  approaching  this  very 
delicate  question.  In  the  first  place,  it  may  be 
observed  that  no  other  bank  makes  any  dis- 
tinction in  its  balance-sheet  between  the  various 
classes  of  its  customers,  so  that  the  Bank  of 
England  by  separating  the  Public  and  Other  De- 
posits makes  a  certain  concession  to  the  peculiar- 
ities of  its  position.  It  is  also  clear  that  the  Bank 


254  -       THE  MEANING  OF   MONEY 

of  England  could  not  fairly  be  asked  to  give  a 
separate  statement  of  the  balances  of  its  banking 
customers  unless  they  themselves  expressed  a 
definite  and  unanimous  desire  that  it  should  do  so. 
As  their  banker  it  is  their  confidential  servant,  and 
it  has  no  right  to  tell  the  general  public  what  they 
have  got  in  its  books,  singly  or  collectively,  unless 
under  instructions  from  them. 

The  Bank  of  England  is  generally  believed 
to  be  opposed  to  the  separate  statement  of  the 
bankers'  balances  and  has  been  publicly  accused 
— apparently  without  foundation — by  a  bank  chair- 
man of  instigating  the  Treasury  to  block  a  motion 
in  Parliament  for  a  return  showing  them.  But  it 
appears  that  the  Bank  does  not,  as  such,  object  to 
the  separation  in  the  return  of  the  bankers' 
balances  from  the  Other  Deposits,  if  requested  to 
show  them  by  all  the  other  banks  or  by  an  order 

f  from  Parliament.     It  is  asserted,  however,  that  at 

\  certain  periods'  of  the  year  these  bankers'  balances 
are  larger  than  the  Bank  of  England's  reserve,  and 
this  may  well  be  the  case,  when  the  banks  are  calling 

N  in  loans  for  balance-sheet  purposes  at  the  end  of 
the  half-years,  and  the  bill-brokers  are  thereby 

i  driven  to  the  Bank  to  supply  the  rest  of  the  com- 
munity with  emergency  credit,  by  borrowing  from 
tit  for  a  few  days,  until  the  other  banks  are  once 
Vnore  lending  freely.  The  publication  of  the 
bankers'  balances,  swollen  in  this  manner  to  a  total 


THE  BANKERS'  BALANCES     255 

above  that  of  the  Bank's  reserve,  might  lead  to 
false  deductions  by  the  general  public,  and  it  is 
therefore  conceivable  that  the  Bank  might  with- 
draw the  facilities  hitherto  granted  for  the  pro- 
vision of  this  emergency  credit.  The  withdrawal 
of  these  facilities  would  be  inconvenient  to  traders 
and  other  users  of  credit,  though  it  would  tend  to 
the  increase  of  the  cash  reserves  normally  held  by 
the  banks. 

The  little  item  of  a  few  thousand  pounds'-worth 
of  seven-day  and  other  bills — "a  trifle,  some  ten- 
penny  matter,"  as  Prince  Hal  says— represents  an 
old-fashioned  form  of  remittance  still  used  for 
certain  revenue  payments. 

We  now  turn  to  the  other  side  of  the  account 
to  consider  the  assets  which  the  Bank  holds  against 
these  liabilities  to  its  stockholders  and  customers. 
We  have  seen  that  the  two  first  liabilities,  capital 
and  Rest,  are  owed  by  it  only  to  its  proprietors,  and 
are  therefore  not  a  debt  in  the  same  sense  as  the 
others,  and,  when  working  out  the  proportion  of 
cash  to  liabilities,  it  is  only  the  liability  to  cus- 
tomers, the  Government  and  other  depositors,  and 
the  holders  of  seven-day  and  other  bills,  that  is 
included  in  the  calculation. 

In  its  treatment  of  the  liabilities  side  of  its 
account  we  found  that  the  Bank  to  this  extent 
gives  fuller  information  than  other  banks,  in  that  it 
separates  the  Public  from  the  Other  Deposits ;  but 


256  THE  MEANING  OF  MONEY 

on  the  assets  side  its  statement,  which,  be  it  re- 
membered, was  arranged  for  it  by  Parliament  sixty 
odd  years  ago,  is  distinguished  by  obscurity.  It 
makes  no  distinction  between  its  investments,  its 
_-,  loans  and  its  discounts,  all  of  which  are  stated 
A  under  the  heading  of  securities,  these  being  dis- 
tinguished as  Government  and  Other.  In  this  case 
again  Government  means  only  British  Government, 
and  the  item  Government  securities  covers  the 
Bank's  holding  of  Consols  and  other  British  Govern- 
ment stocks,  Treasury  bills,  Exchequer  bonds,  and 
ottiejr  short  obligations  of  the  Government,  and  any 
loans  that  it  may  have  to  make  to  the  Treasury  in  the 
shape  of  Ways  and  Means  or  Deficiency  advances, 
when  the  exigencies  of  "supply"  or  of  dividend 
payments  compel  the  Government  to  draw  on  its 
banker.  As  these  temporary  borrowing  operations 
by  the  Treasury  are  indicated  more  or  less  by  the 
weekly  returns  of  public  income  and  expenditure, 
published  in  the  Gazette,  it  is  possible  with  their 
assistance  to  get  a  dim  glimpse  of  the  meaning  of 
the  movements  in  the  Government  securities  in  the 
Bank  return ;  but  these  Government  returns  are 
slow  in  appearance,  inadequate  in  information,  and 
obscure  in  expression,  and  any  one  who  attempts 
to  find  his  way  with  their  help  towards  a  compre- 
hension of  the  relations  between  the  Government 
and  the  money  market  is  entering  a  path  full  of 
pitfalls.  It  is  rather  curious  that  the  money  market, 


THE   GOVERNMENT  SECURITIES       257 

which  so  often  has  to  come  to  the  assistance  of  the 
Government  by  subscribing  to  Treasury  bills  or 
otherwise,  submits  patiently  to  handing  over  its 
money  to  a  borrower  whose  operations  are  veiled 
in  so  much  mystery,  and  at  the  same  time  are  of 
such  great  importance.  Broadly,  however,  it  may 
be  stated  that  when  the  Government  securities 
item  rises,  either  the  Bank  has  been  increasing  its 
holding  of  Consols  or  other  Government  obligations, 
funded  or  unfunded,  or  else  has  been  making  some 
sort  of  an  advance  to  the  British  Government ;  and 
when  it  declines,  it  goes  without  saying  that  one  of 
the  contrary  operations  has  taken  place,  that  the 
Bank  has  been  selling  its  Consols,  etc.,  or  having 
an  advance  repaid  by  the  Government ;  but  there  is 
yet  another  possibility,  for  the  Bank  may  have  been 
borrowing  from  the  market  and  giving  some  of  its 
Government  stocks  as  security.  When  it  borrows 
in  order  to  curtail  the  supply  of  credit  it  is  usual  to 
see  a  decrease  in  the  Government  securities,  and 
sometimes  in  the  Other  Securities  likewise.  But  it 
is  important  to  remember  that  when  the  Bank  lends 
money  to  the  market  its  holding  of  Government 
securities  is  not  thereby  affected  ;  very  probably  it 
lends  on  the  security  of  Consols,  but  this  security 
is  only  collateral  and  the  borrowers'  promise  to 
pay  is  what  it  relies  on  first,  and  it  therefore  in- 
cludes advances  to  any  borrower  but  the  British 
Government  under  Other  Securities. 

s 


258    -      THE  MEANING  OF  MONEY 

The  Other  Securities  are  thus  already  to  a  great 
extent  explained.  They  include  all  investments 
heldby  the  Bank,  other  than  obligations  of  the 
British  Government;  all  advances  to  its  private 
customers,  or  to  bill-brokers,  stockbrokers,  muni- 
cipalities, colonial  Governments,  accepting  houses, 
colonial  or  foreign  banks,  or  any  one,  except  the 
British  Government,  who  may  have  need  of  its  ser- 
vices and  possess  the  wherewithal  to  obtain  them ; 
all  the  bills  that  it  has  discounted,  whether  in  order 
to  provide  credit  for  the  London  bill-brokers,  when 
cash  has  been  called  in  from  them  by  the  other 
banks,  or  in  the  ordinary  course  of  trade.  The 
comprehensive  nature  of  this  item  thus  entails  much 
wariness  in  drawing  conclusions  from  its  move- 
ments, and  it.  is  often  suggested  that  the  Bank 
return  would  be  a  much  more  lucid  statement  of 
the  position  if  its  loans,  discounts  and  investments 
were  separately  stated  instead  of  being  thus  massed 
together.  The  gain  in  lucidity  would  certainly  be 
enormous,  and  it  is  difficult  to  see  that  any  valid 
objection  can  be  raised  against  this  step  in  the 
direction  of  publicity  and  clearness. 

Finally,  having  thus  arrayed  the  obscurities 
which  clog  any  attempt  to  unravel  the  meaning  of 
the  Bank  return  and  the  movements  in  its  various 
items  without  assistance  from  those  who  know 
what  is  behind  the  figures,  we  may  arrive  at 
the  one  broad  and  platitudinous  conclusion  that 


THE  BANK'S  SECURITIES  259 

can  invariably  be  drawn  from  a  change  in  the 
Bank's  holding  of  securities.  It  is  safe  to  expect 
that  any  increase  in  the  securities  will  pro 
tanto  increase  the  supply  of  money,  and  any  de- 
crease will  reduce  it.  For  since  every  amount 
lent  means  a  corresponding  credit  in  the  Bank's 
books,  an  increase  in  the  securities  causes  a  cor- 
responding increase  in  the  deposits,  either  Public 
or  Other;  and  if  the  Public  deposits  have  been 
increased  by  an  advance  from  the  Bank  it  may 
be  assumed  that  this  has  been  done  because  the 
Government  has  payments  to  make,  and  that  the 
increase  will  shortly  be  transferred  to  the  Other 
deposits,  and  so  will  be  added  to  the  "cash  at  the  ( 
Bank  of  England  "  in  the  books  of  other  banks, 
which  is  regarded  as  equivalent  to  gold  as  part  of  A 
the  basis  of  credit.  Or  the  increased  credit  may  J 
be  employed  in  the  withdrawal  of  actual  currency 
from  the  Bank,  which  will  so  be  added  to  the  cash 
in  hand  of  the  commercial  community.  At  the 
same  time  it  is  equally  true  that  an  increase  in  the 
Bank's  securities,  though  it  tends  to  make  money 
cheap,  is  generally  accompanied,  and  caused,  by 
dearness  of  money,  which  drives  borrowers  to  the 
Bank  in  order  to  increase  the  supply. 

And  now  we  come  to  the  last  two  items  on  the 
assets  side  of  the  account,  which  taken  together 
constitute  what  is  generally  spoken  of  as  the 
reserve  of  the  Bank  of  England.  It  should  be  noted 


260      «    THE  MEANING  OF  MONEY 

that  this  reserve  is,  in  accordance  with  the  confus- 
ing habit  of  economic  phraseology,  a  reserve  in 
quite 'a  different  sense  from  the  reserve  or  reserve 
fund  of  another  bank  or  company.  Ordinarily  a 
company's  reserve  means  an  accumulation  from 
profits  which  have  not  been  distributed  as  dividend 
but  kept  in  hand  for  use  in  case  of  need.  The 
Bank'  of  England,  as  we  have  seen,  possesses  a 
reserve  of  this  kind,  and  calls  it  its  Rest.  But  when 
we  speak  or  write  of  the  Bank's  reserve  we  mean 
its  holding  of  cash  in  the  Banking  Department  In 
the  account  before  us  it  consists  chiefly  of  notes 
with  a  comparatively  small  proportion  of  coin 
and  bullion;  the  coin  and  bullion  may  be  called 
the  Bank's  till  money,  the  coin  that  it  has  in 
hand  to  meet  cheques  drawn  on  it,  and  for  other 
ordinary  banking  business.  Any  more  gold  that 
comes  into  the  Bank's  hands  goes  into  the  Issue 
Department,  and  notes  are  issued  against  it  and 
put  into  the  assets  of  the  Banking  Department. 
It  is  a  confusing  and  complicated  arrangement  that 
makes  the  notes  a  liability  of  the  Issue  Depart- 
ment and  an  asset  of  the  Banking  Department, 
but  we  can  simplify  it  a  little  by  regarding  the 
notes  of  which  the  reserve  largely  consists  as 
bullion  certificates  representing  gold  in  the  vaults 
of  the  Issue  Department. 

For  practical  purposes  we  are  justified  in  doing 
so,  but  it  must  not  be  forgotten  that  notes  are  not 


ECONOMY  OF  METAL  261 

actually  quite  bullion  certificates,  since  as  we  have 
seen  they  are  to  some  extent  based  on  securities 
and  Government  debt,  and  in  the  account  before  us 
about  one-third  of  the  backing  of  the  notes  is  thus 
composed.  And  it  thus  appears  that  the  liabili- 
ties of  the  Banking  Department  of  the  Bank  of 
England,  which  are  used  as  the  basis  of  credit 
by  the  rest  of  the  banking  community,  are  repre- 
sented as  to  one-half  or  rather  more  by  securities, 
and  as  to  most  of  the  rest  by  notes,  which  are  again 
represented  as  to  about  one-third  by  securities.  It 
is  a  beautiful  if  rather  complicated  development  of 
the  use  of  credit,  and  economy  of  metal,  but  the 
attractiveness  of  the  system,  on  paper,  and  its 
smooth  working  in  practice,  make  it  all  the  more 
essential  to  be  sure  that  the  solidity  of  the  machine 
is  carefully  watched  over,  and  that  metal  is  not 
economized  to  a  dangerous  extent. 

This  part  of  the  Bank  of  England's  task  is  the 
more  difficult  because  it  has  no  control  over  the 
extent  to  which  its  banking  customers  create  credit. 
All  that  it  can  do  is  to  try  to  maintain  its  reserve 
by  the  use  of  its  rate,  when  its  rate  is  effective,  but 
the  quantity  and  quality  of  the  credits  that  are 
given  to  the  commercial  community  both  local  and 
foreign  by  the  other  bankers  are  matters  which  are 
necessarily  in  the  hands  of  the  latter.  And  the 
elasticity  of  the  system,  which  is  one  of  its  chief 
attractions,  thus  results  in  the  Bank's  reserve  being 


262  THE  MEANING  OF  MONEY 

liable  to  be  depleted  by  credits  given  by  its  cus- 
tomers, over  which  it  can  have  no  control.  An 
advance  given  by  one  of  the  other  banks  to  a  foreign 
financier,  in  the  shape  of  a  loan  against  securities, 
or  an  acceptance  or  the  discount  of  a  bill,  may  mean 
that  the  foreigner  takes  advantage  of  the  credit  so 
given  to  demand  gold ;  this  demand  will  fall  ulti- 
mately on  the  Bank  of  England,  which  will  take  the 
gold  out  of  its  vaults  and  cancel  a  corresponding 
number  of  notes.  As  it  obviously  cannot  cancel 
notes  in  circulation  it  has  to  cancel  those  in  its 
Banking  Department,  and  so  its  reserve  is  thereby 
diminished  by  an  operation  of  which  it  had  no 
knowledge.  And  we  so  come  back  once  more  to 
the  importance  of  the  other  banks,  and  see  that  the 
manner  in  which  they  conduct  their  business  of 
credit-making  has  a  very  considerable  bearing  on 
the  problem  of  the  defence  and  maintenance  of  the 
Bank  of  England's  reserve. 


CHAPTER  XIV 

THE   GOLD   RESERVE 

HAVING  thus  completed  our  inspection  of  the  main 
wheels  in  the  monetary  machine,  and  arrived  at  a 
necessarily  rough  and  elementary  notion  of  the 
manner  in  which  they  work  together  and  react 
upon  one  another,  we  are  in  a  position  to  consider 
the  problem  that  has  for  many  years  exercised 
the  banking  world,  namely,  the  alleged  inade- 
quacy of  the  metallic  basis  on  which  the  monetary 
machine  manufactures  credit,  and  the  measures 
necessary  for  reinforcing  it. 

This  inadequacy  has  been  asserted  over  and 
over  again  by  bank  chairmen  at  half-yearly  meet- 
ings, and  by  presidents  of  the  Bankers'  Institute  in 
the  course  of  inaugural  addresses,  and  the  few 
dissentients  who  deny  its  existence,  generally 
complicate  matters  by  maintaining  that  what  is 
wrong  is  not  the  lack  of  gold  but  the  over-extension 
of  credit.  We  need  not  pause  to  consider  this  deli- 
cate subtlety.  Whether  the  foundation  be  too  small 
for  the  building,  or  the  building  be  too  big  for  the 
foundation,  the  same  practical  conclusion  arises, 


264  THE  MEANING  OF  MONEY 

namely,  that  either  the  building  must  be  reduced,  or 
the  foundation  must  be  increased,  or  both  processes 
must  be  carried  out  together.  And  when  we  find 
bankers  themselves  maintaining  that  the  gold  basis 
of  their  credit  operations  is  inadequate,  it  must 
be  admitted  that  their  evidence  is  of  the  greatest 
possible  weight,  and  that  any  outsider  who  gainsaid 
it  would  incur  a  heavy  responsibility. 

We  have  seen  that  banking  in  England,  in  its 
modern  sense,  works  without  any  legal  fetter  or 
restriction,  and  we  have  seen  reason  for  being 
thankful  that  it  does  so.  And  we  have  also  seen 
that  it  has  perfected  a  marvellously  efficient  system 
of  credit,  with  a  metallic  basis  economized  with 
unparalleled  skill  and  success.  And  the  more 
closely  one  examines  the  basis  of  credit,  the  more 
clearly  it  becomes  apparent  that  that  basis  itself 
consists  to  a  considerable  extent  of  credit. 

For  example,  we  saw  that  the  half-dozen  big 
banks  whose  balance-sheets  we  amalgamated  on 
p.  59,  had  as  the  cash  basis  of  their  liabilities  on 
current  and  deposit  account,  which  amounted  to 
249  millions,  43  millions  of  cash  in  hand  and  at  the 
Bank  of  England— nearly  18  per  cent.,  a  high  pro- 
portion according  to  present  ideals.  It  would  be 
interesting  to  know  how  much  of  this  is  gold.  One 
of  the  banks  included,  the  Union  of  London  and 
Smith's,  which  we  have  referred  to  before  as  being 
conspicuously  explicit  in  its  balance-sheet,  shows 


CREDIT   BASED  ON   CREDIT  265 

this  same  quality  again  by  separating,  alone  among 
its  peers,  its  cash  in  hand  from  its  cash  at  the  Bank 
of  England.  It  had  on  June  30,  1908,  £3,009,000  of 
cash  in  hand  and  £3,4 12,000  at  the  Bank  of  England. 
If  these  figures  be  a  safe  guide  to  the  position  of 
the  Union's  brethren,  which  we  must  admit  that 
they  may  not  be,  we  shall  be  within  the  mark  if  we 
assume  that,  out  of  the  43  millions  held  by  the 
aggregated  six,  20  millions  are  cash  at  the  Bank  of 
England,  that  is,  are  a  liability  of  the  Bank  of  Eng- 
land to  these  six  banks.  But  the  Bank  of  England's 
normal  proportion  of  cash  to  liabilities  in  its  Bank- 
ing Department  ranges  from  about  35  to  55  per  cent; 
and  if  we  take  it  at  50  per  cent.,  we  are  again  doing 
full  justice  to  the  position ;  so  that  of  these  20 
millions  on  which  the  six  banks  have  based  credits 
icTare  represented  by  cash  held  by  the  Bank  of 
England.  Moreover,  the  cash  held  by  the  Bank 
of  England's  Banking  Department  consists  chiefly 
of  its  own  notes,  and  its  notes,  though  regarded  for 
practical  purposes  as  a  bullion  certificate,  are  actu- 
ally backed  by  securities  to  the  extent  of  nearly 
18^  millions — almost  exactly  one-third  of  the  out- 
standing amount  of  notes  in  the  return  given  on 
p.  244.  We  thus  arrive  at  the  conclusion  that,  of 
the  cash  at  the  Bank  of  England  which  other  banks 
use  as  the  basis  of  credit,  half  may  be  taken  as 
represented  by  securities  and  half  by  cash,  and 
that  this  cash  is  itself  represented  as  to  one-third 


266  THE  MEANING  OF  MONEY 

by  securities  and  two-thirds  by  gold.  Th£  20 
millions  of  cash  at  the  Bank  of  England  are  thus 
found  to  be  based  on  £6,666,666  of  actual  gold. 

And  this  is  not^ll.  For  a  considerable  propor- 
tion of  the  cash  in  hand  shown  by  the  other  banks 
will  certainly  consist  of  Bank  of  England  notes,  of 
which  we  have  seen  one-third  to  be  represented  by 
paper.  Skill  and  success  in  the  economy  of  metal 
could  hardly  be  carried  further. 

The  reasons  which  make  a  gold  basis  necessary 
for  credit  were  traced  in  earlier  chapters,  and  may 
be  roughly  summarized  as  arising  from  the  fact 
that  gold  is  the  only  commodity  that  is  everywhere 
and  always  in  the  economically  civilized  world 
accepted  in  payment  of  a  debt,  and  that  readiness 
to  meet  liabilities  in  gold,  at  once  and  without 
question,  is  an  essential  part  of  a  banker's  business 
as  understood  in  this  country. 

The  liabilities  of  bankers  to  the  public  we  have 
seen  to  be  created,  for  the  most  part,  by  securities 
that  they  buy  and  advances  that  they  make  in  one 
form  or  another,  the  advances  being  the  much 
bigger  item,  and  bankers'  liabilities  form  the  credits 
with  which  the  financial  and  commercial  body 
carries  on  its  business,  and  against  which  it  draws 
the  cheques,  which  are  the  most  important  part  of 
our  currency.  The  problem  of  banking  is  the  crea- 
tion of  these  credits  for  the  service  of  commerce, 
with  due  consideration  for  a  sufficient  basis  of  gold 


THE  GOLD  RESERVE  267 

to  meet  the  demands  which  these  liabilities  render 
^possible.  A  banker  who  holds  too  high  a  propor- 
tion of  gold  curtails  his  own  or  his  shareholders' 
profits  and  the  credit  resources  of  the  commercial 
community.  The  banker  who  holds  too  low  a  pro- 
portion runs  a  risk  of  being  unable  to  meet  his 
liabilities,  to  the  detriment  of  his  bank's  credit,  and 
with  the  possibility  of  raising  a  storm  which  might 
shake  the  whole  banking  community.  Between 
these  two  evils  the  banker  is  asked  to  steer  a  middle 
course  along  the  line  of  prudence  and  common- 
sense,  and  he  is  now  convicted  out  of  his  own 
mouth  of  having  erred  a  little  on  the  side  of  making 
too  much  credit  out  of  too  little  gold. 

The  fact  that  the  banking  world  is  in  a  position 
to  air  in  public  the  existence  of  this  error  of  its  own 
is  a  comforting  proof  of  its  own  confidence  in 
itself,  and  indicates  very  clearly  that  the  extent  of 
the  error  is  not  considerable.  It  is  the  healthiest 
possible  sign  of  the  soundness  of  the  banking  posi- 
tion, and  shows  that  the  alarmists  who  point  to  the 
higher  level  of  banking  reserves  held  in  other  coun- 
tries, and  then  draw  terrifying  inferences  concerning 
the  conditions  prevalent  here,  are  exciting  them- 
selves needlessly.  As  long  as  bankers  are  criticizing 
themselves  and  one  another  in  public,  we  may  be 
sure  that  the  evil  is  not  very  deep-rooted.  Never- 
theless, the  dangers  involved  by  this  evil,  which 
have  been  pointed  out  above,  are  such  that  it  should 


268  THE  MEANING  OF  MONEY 

be  removed  at  once.  And  so,  though  this  book  is 
only  designed  to  make  monetary  matters  a  little 
clearer  to  those  who  do  not  understand  them,  it 
would  not  be  complete  without  some  account  of 
the  suggestions  that  have  been  made  for  the 
solution  of  the  problem. 

Among  these  suggestions  many  seem  to  indicate 
that  the  desired  increase  in  the  gold  basis  of  credit 
is  to  be  acquired  by  taking  gold  out  of  one  pocket 
and  putting  it  into  the  other.  Whether  it  is  to  be 
done  by  the  Treasury  keeping  a  reserve  against  its 
banking  liabilities  to  savings  bank  depositors,  or  by 
its  repaying  its  debt  to  the  Bank  of  England  in 
gold,  or  by  the  establishment  of  a  national  gold 
reserve  at  the  expense  of  the  taxpayer,  or  by  an 
issue  of  £i  notes  against  gold,  or  by  the  amass- 
ing of  a  special  reserve  by  the  banks  to  be 
deposited  at  the  Bank  of  England  under  special 
safeguards,  and  only  touched  in  times  of  need— 
and  all  these  proposals  have  been  put  forward 
as  a  solution  of  the  problem — it  never  seems 
to  be  observed  that  the  amount  of  gold  in  the 
country  will  not  be  directly  increased  by  any  of 
them.  For  whether  the  Treasury  or  the  bankers 
produced  the  gold  for  the  new  reserve  or  to  repay 
the  bank,  etc.,  it  could  only  be  got  by  either  taking 
it  from  the  Bank  of  England's  vaults  and  putting 
it  back  again,  or  by  taking  it  out  of  the  tills  of 
the  other  banks  and  putting  it  into  the  Bank  of 


THE  BULLION  MARKET  269 

England's.  And  in  either  case  the  relation  of 
the  amount  of  credit  to  its  gold  base  would  be 
unaltered. 

If,  as  is  generally  acknowledged  in  the  City,  the 
gold  basis  of  our  credit  be  inadequate,  it  must  be 
increased— since  we  do  not  dig  out  gold  in  this 
country,  and  have  no  big  hoards  that  can  be  drawn 
on  in  our  stockings  and  our  pockets — by  imports, 
or  rather  by  the  retention  of  a  larger  proportion  of 
the  imports  of  gold  which  come  here  regularly  week 
by  week  from  the  mines  of  Johannesburg. 

These  mines  are  the  chief  source  which  feeds  the 
London  bullion  market.  Every  Saturday  the  Union 
Castle  steamer  from  the  Cape  lands  a  parcel  of  raw 
gold  from  the  Rand ;  every  Monday  it  is  dealt  with 
in  the  bullion  market,  and  after  being  refined  goes 
to  its  purchaser.  A  certain  proportion  is  always 
taken  by  "  the  trade,"  that  is,  the  goldsmiths  and 
others  who  use  it  in  the  arts  and  in  commerce,  and 
a  certain  proportion  nearly  always  goes  to  India  in 
the  form  of  small  and  specially  polished  bars  dear 
to  native  hoarders.  The  rest,  if  there  be  no  com- 
petition, goes  to  the  Bank  of  England,  which  pays 
for  it,  or  gives  credit  for  it,  at  the  rate  of  £3  175.  gd. 
per  oz.  When  there  is  competition,  foreign  buyers 
TaKeTpart  of  the  parcel  or  all  of  it ;  and  sometimes 
the  Bank  of  England  secures  a  share  by  paying 
rather  more  than  its  statutory  price,  though  it 
rarely  bids  higher  than  775.  io\d.t  which  is  the 


2;o         ..THE  MEANING  OF  MONEY 

rate  at  which  gold  is  coined  into  sovereigns.  But 
gold  is  best  secured  or  retained,  not  by  bidding  for 
it  in  the  bullion  market,  but  by  influencing  the 
foreign  exchanges  through  the  discount  rate  current 
in  the  open  market. 

It  has  been  shown  in  preceding  chapters  that 
the  foreign  demand  for  gold  chiefly  depends  on  the 
state  of  the  exchanges.  If  the  Paris  cheque  is  at 
25/  13^.  it  is  cheaper  for  any  one  who  has  a  remit- 
tance to  make  to  France  to  send  gold  rather  than 
buy  a  draft.  And  the  state  of  the  foreign  exchanges 
is  influenced  by  the  market  rate  of  discount;  if  the 
market  rate  is  ij  per  cent,  here  and  if  per  cent,  in 
Paris,  French  holders  of  English  bills  will  not  renew 
them  as  they  fall  due,  but  send  them  over  to  be 
collected  and  take  the  proceeds  away ;  and,  as  we 
have  seen  that  it  pays  better  at  a  certain  exchange 
to  take  the  proceeds  in  gold  than  by  the  purchase 
of  a  draft,  gold  goes  from  London  to  Paris. 

Sometimes  the  foreign  demand  for  gold  arises 
from  uneasiness,  financial  or  political,  at  some 
foreign  centre,  which  impels  it  to  bid  eagerly  for 
gold,  even  though  it  may  not  be  the  more  profitable 
form  of  remittance.  But  these  operations  are  ab- 
normal and  exceptional,  and  it  may  be  said  that  as 
a  general  rule,  and  with  allowance  for  the  innumer- 
able exceptions  that  complicate  the  working  of  the 
most  watertight  economic  law,  gold  is  taken  from 
London  when  the  exchanges  are  against  us,  and 


GOLD  AND  THE  EXCHANGES         271 

the  exchanges  are  influenced  by  the  market  rate  of 
discount,  which  affects  the  import  and  export  of 
securities,  and  so  the  trade  balance  in  the  widest 
sense  of  the  term. 

It  therefore  seems  to  .follow  that  in  order  to 
attract  gold,  or  to  retain  a  larger  share  of  the  gold 
thaTcomes  here  from  the  English-owned  mines  in 
Johannesburg,  it  is  necessary  to  have  a  temporarily 
higher  level  of  discount  rates  here.  For,  if  we  set 
about  the  business  in  the  only  other  possible  way, 
by  Paying  a  higher  price  for  gold  than  anybody  else 
in  the  bullion  market,  it  is  most  probable  that  we 
shall  only  make  matters  worse,  because  as  fast  as 
the  gold  is  accumulated,  the  faster  will  discount 
rates  go  down,  and  the  more  the  exchanges  will  go 
against  us,  and  the  keener  will  foreign  competition 
for  gold  become.  For  as  monetary  matters  are  at 
present  arranged,  any  increase  in  the  gold  reserve 
stimulates  expectations  of  cheaper  credit  and  en- 
courages the  bankers  and  bill-brokers  to  buy  bills 
at  lower  rates. 

Having  thus  groped  our  way  to  a  conclusion  as 
to  the  method  by  which  an  increase  in  the  gold 
basis  of  credit  is  to  be  secured,  let  us  try  to  dis- 
cover who  should  bear  the  expense,  if  any,  of  the 
operations  that  have  to  be  carried  out.  More  gold 
is  wanted,  because  it  is  considered  by  the  banking 
community  that  the  amount  of  currency  and  credit 
is  too  big  for  the  foundation  of  gold  on  which  it  is 


272  THE  MEANING  OF  MONEY 

based.  The  creation  of  this  currency  and  credit  is 
profitable  to  those  who  make  them  and  to  those 
who  use  them,  in  other  words,  to  the  bankers, 
including  the  Bank  of  England,  and  to  the  com- 
mercial and  financial  community,  including  the 
Government,  which  makes  both  permanent  and 
occasional  use  of  the  credit  machine.  And  it  seems 
obviously  fair  that  those  who  benefit  by  the  exten- 
sion and  elasticity  of  our  currency  and  credit  system 
should  make  any  sacrifice  that  may  be  necessary 
for  the  establishment  of  a  stronger  foundation 
for  it. 

When  bankers  approach  this  question  they  are 
fond  of  pointing  an  accusing  finger  at  the  Post- 
Office  Savings  Bank,  and  the  fact  that  the  Treasury 
keeps  not  one  farthing  of  metallic  reserve  against 
the  millions  of  liability  that  this  bank  has  in  its 
books ;  and  they  maintain  that  the  Treasury  ought 
to  lead  the  way  by  making  amends  in  this  matter 
and  providing  a  reserve  of  gold  against  the  Savings 
Bank  deposits.  With  all  deference  to  the  eminent 
authorities  who  have  enunciated  this  theory,  I 
venture  to  think  that  they  are  shooting  at  the 
wrong  mark.  The  manner  in  which  the  Treasury 
has  handled  this  question  of  Savings-Bank  finance 
is  open  to  vigorous  and  voluminous  criticism,  but 
it  is  happily  irrelevant  to  the  present  problem. 
The  Post-Office  Savings  Bank  is  not  a  bank  in 
the  ordinary  sense  of  the  word,  and  has  nothing 


THE  GOVERNMENT'S  RESPONSIBILITY  273 

to  do  with  this  question  of  strengthening  the 
basis  of  currency  and  credit,  because  it  issues  no 
currency  and  creates  no  credit.  No  one  draws  a 
cheque  on  the  Post-Office  Savings  Bank,  and  no 
borrower  goes  to  it  with  securities  or  bales  of  wool 
to  ask  it  for  an  advance.  It  is  a  trust  company* 
rather  than  a  bank,  and  the  fact  that  it  has  the  con- 
solidated fund  of  the  United  Kingdom  to  draw  on 
at  need  makes  the  provision  of  a  gold  reserve  for 
it  a  needless  and  expensive  luxury. 

The  point  at  which  the  Government  touches 
on  the  gold  reserve  question  lies  rather  in  the 
fact  that  it  is  to  a  certain  extent  responsible  for 
one  of  the  weaknesses  in  the  basis  of  credit  and 
currency,  by  permitting  the  Bank  of  England  to 
issue  notes  against  a  promise  to  pay  by  the 
Treasury.  We  have  seen  above  that  one  of  the 
assets  held  in  the  Bank's  Issue  Department  against 
its  note  issue  is  a  loan  to  the  Government  standing 
at  eleven  millions  odd.  Since  the  Bank  Charter 
Act  was  passed  the  cheque  has  to  a  great  extent 
taken  the  place  of  the  note  for  the  purpose  of 
currency,  and  the  note  has  become  a  basis  of 
currency,  being  held  chiefly  by  bankers  in  their 
tills  and  cash  reserves,  and  as  part  of  the  founda- 
tion on  which  they  build  their  fabric  of  credit. 
This  being  so,  without  any  disrespect  to  the 

*  In  the  English  sense,  meaning  an  investment  company. 
Cf.  p.  80,  «. 

T 


274  THE  MEANING  OF  MONEY 

framers  of  the  Act  we  can  point  out  that  a  piece 
of  paper  which  is  used  as  aTTJasis  for  currency 
and  credit  ought  to  be  as  little  as  possible  based 
on  other  pieces  of  paper,  in  other  words  that  the 
fiduciary  part  of  the  Bank's  note  issue  might  with 
advantage  be  reduced.  And  a  very  simple  and 
obvious  method  of  curtailing  the  proportion  of 
paper  that  is  behind  the  bank-note  would  be  for 
the  Government  to  repay  gradually  its  book  debt 
of  eleven  millions,  perhaps  at  the  rate  of  half  a 
million  or  a  million  per  annum,  according  to  the 
prevalent  conditions.  There  would  be  no  need 
to  ask  the  Treasury  to  make  this  repayment  in 
gold  and  to  expect  it  to  go  into  the  bullion  market 
and  bid  for  the  necessary  metal.  I  have  tried  to 
show  that  this  is  not  the  best  way  to  increase  the 
gold  store,  and  in  any  case  it  is  not  an  operation 
that  the  Treasury  is  well  qualified  to  carry  out. 
All  that  is  wanted  is  that  the  Government  should 
out  of  the  Sinking  Fund  give  the  Bank  a  cheque 
for  perhaps  half  a  million  a  year,  in  redemption  of 
its  book  debt,  which  heads  the  assets  in  the  Issue 
Department.  A  small  part  of  the  Sinking  Fund 
would  be  devoted  to  this  purpose  and  would  be 
redeeming  debt,  which  is  its  business. 

Let  us  see  what  would  follow.  In  the  Issue 
Department  account  in  the  Bank  return  the  notes 
issued  and  the  Government  debt  would  both  be  re- 
duced by  half  a  million.  In  the  Banking  Department 


THE  FIDUCIARY  NOTE  ISSUE         275 

account  the  Public  Deposits  would  be  reduced  by 
half  a  million  and  likewise  the  notes  held  on  the 
other  side,  forming  part  of  the  Bank's  reserve. 
The  reduction  ?n  tb^  Puhlic  Pppogifq  w^nH  ulti- 
mately  reduce  the  Other  Deposits,  because  the  use 
of  Sinking  Fund  money  for  cancellation  of  this  debt 
would  reduce  the  amount  that  would  otherwisei)e 
transferred  to  them  throu.gfr  BlUffr0*"*  "f  finnflflh  flT 
other  stock.  The  proportion  of  metal  behind  the 
bank-note  would  thus  be  increased.  If  the  process 
were  sufficiently  gradual  it  would  cause  no  approach 
to  monetary  stringency ;  but  it  would  insensibly 
narrow  the  paper  basis  of  credit,  and  this  narrowing 
would  have  to  be  made  good  by  the  attraction  of 
gold  to  take  the  place  of  the  cancelled  paper.  At 
the  same  time  it  is  chiefly  a  waste  of  time  to  discuss 
such  a  measure,  because  in  the  first  place  it  would 
imply  an  alteration  in  the  Bank's  charter  and  much 
Parliamentary  discussion  and  delay;  and  in  the 
second,  since  most  of  the  profits  of  the  Bank's  / 
fiduciary  issue  go  to  the  Government,  the  loss  fol-  I 
lowing  on  its  reduction  would  fall  on  the  tax-payer,  \ 
who  would  consequently  look  sourly  on  it.  We 
must  try  some  line  of  less  resistance.  / 

The  attraction  of  gold  to  increase  our  store  is 
best  secured,  as  I  have  tried  to  show,  by  means  of 
the  market  rate  of  discount.  The  market  rate  of  dis- 
count is  regulated  in  normal  times  chiefly  by  the 
action  of  the  outer  banks,  and  we  thus  arrive  at  their 

r 


2;6  THE  MEANING  OF  MONEY 

share  in  the  operations  which  are  necessary  for  the 
reinforcement  of  the  basis  of  credit  and  currency. 

Their  share  ought  to  be  substantial.  For  they 
issue  most  of  our  modern  currency  in  the  form  of 
cheque-books  to  be  filled  up  by  their  customers, 
and  manufacture  most  of  the  credit  by  making 
advances,  discounting  bills,  and  financing  the 
discount  houses.  Any  undue  extension  of  credit 
that  exists  may  fairly  be  laid  at  their  door ;  for 
we  have  seen  that  the  Bank  of  England,  which 
is  the  greatest  credit-maker  of  all,  because  the 
credits  that  it  makes  are  regarded  as  cash  by  other 
credit-makers,  exercises  a  self-denying  restraint  in 
the  matter  and  habitually  shows  a  very  much 
higher  proportion  of  cash  to  liabilities  than  the 
other  banks. 

Since,  then,  the  other  bankers  are  themselves 
responsible  for  the  undue  extension  of  credit, 
which  they  themselves  have  stated  to  be  a  problem 
requiring  attention,  it  would  seem  that  they  them- 
selves could  very  easily  settle  the  matter,  by 
quietly  and  gradually  paring  away  the  over-growth 
until  the  volume  of  credit  was  brought  within  a 
satisfactory  relation  to  the  cash  on  which  it  is  based. 
And  it  would  also  seem  that  this  simple  process 
would  be  the  more  expeditiously  set  about  because 
its  operation,  as  we  shall  see,  would  itself  have  the 
effect  of  helping  to  attract  or  retain  gold,  so  that 
the  strengthening  process  would  go  on  at  both 


THE  OTHER  BANKERS  277 

ends  at  once — the  reduction  of  credit  would 
increase  the  basis  of  credit,  and  the  improvement 
in  the  proportion  between  the  two  would  thus 
double  its  pace.  Moreover,  it  would  appear  that 
a  period  of  pronounced  ease  in  the  money  market, 
duelo  slack  trade  and  reaction  after  the  American 
crisis,  would  be  an  ideal  opportunity  for  the  banks 
to  set  about  curing  the  malady  with  which  they 
fin"3  themselves  to  be  afflicted. 

This  opportunity  presented  itself,  and  nothing 
was  done.  And  for  the  very  good  reason  that  the 
banks  are  human.  The  need  for  reform  has  been 
put  forward  by  big  men  in  the  banking  world 
representing  the  big  banks ;  and  the  lesser  lights 
representing  the  smaller  banks  do  not  like  the 
notion  of  seeming  to  be  led  or  instructed.  More- 
over, it  is,  as  a  rule,  the  smaller  banks  that  are  the 
worst  offenders  in  the  matter  of  over-extension  of 
credit,  and  they  fear  that  a  self-denying  ordinance 
would  affect  their  profits  more  than  those  of  their 
bigger  brethren.  So  they,  or  some  of  them,  resent 
the  whole  discussion,  urge  that  any  restriction  of 
credit  would  be  bad  for  trade,  refer  the  question  to 
committees,  ventilate  proposals  for  the  acquisition 
of  gold  by  somebody  else,  and  maintain  that  this 
is  a  national  question  which  ought  to  be  solved 
at  the  national  expense,  and  so  on.  All  this  is 
very  natural  and  reasonable  and  human,  but 
does  not  quicken  progress.  And  the  advocates 


278  THE  MEANING  OF  MONEY 

of  reform  are  forced  to  the  melancholy  conclusion 
that  agreement  among  the  banks,  which  is  the 
obvious  and  simple  way  of  securing  it,  seems  to 
be  impossible. 

This  result  is  the  more  lamentable  because  the 
smaller  banks  are  asked  to  do  very  little.  Nobody 
suggests  that  a  cast-iron  rule  ought  to  be  laid  down 
as  to  the  proportion  between  cash  and  liabilities 
that  a  bank  ought  to  keep.  All  that  is  needed  is 
an  extension  of  the  publicity,  which,  partially  and 
illogically  applied,  has  already  been  coincident 
with  a  great  increase  in  banking  solidity  and 
strength. 

In,,  other  words,  it  is  only  suggested  that  the 
banks  should  show  what  proportion  of  cash  to 
liabilities  they  habitually  keep.  This  is  already 
done  by  nearly  all  the  biggest,  strongest  and  most 
successful,  and  the  adoption  of  the  practice  by  the 
rest  seems  a  most  modest  suggestion  in  the 
direction  of  reform. 

We  have  seen  in  a  former  chapter  that,  under 
present  arrangements,  some  banks  publish  a  yearly 
balance-sheet,  most  of  them  a  half-yearly,  and  a 
select  few  issue  a  monthly  statement  of  cash  and 
liabilities;  of  these  last,  one  shows  its  avecgge 
daily  cash  holding  throughout  the  month,  the 
rest  show  the  position  on  one  day.  In  the  case 
of  some  of  them  it  is  known  that  this  statement 
gives  a  fair  view  of  their  normal  position,  but  in  that 


THE  REMEDY  OF  PUBLICITY         279 

of  others  it  is  suspected  that  loans  are  occasionally 
called  in  or  bills  are  allowed  to  run  off,  with^  a 

view  to  making  a  good  display  of  cash,  so  that 
the  statement  is  to  some  extent  misleading;  and 
the  habitual  development  towards  stringency 
shown  at  the  end  of  every  month  lends  colour 
to  this  belief.  The  more  acute  development  of 
stringency  towards  the  end  of  each  half-year, 
though  to  some  extent  due  to  other  causes,  also 
tends  to  show  that  the  many  banks  which  prepare 
balance-sheets  only  at  those  periods,  restrict 
credits  with  the  same  object. 

It  is  therefore  contended  that,  if  all  banks 
regularly  showed  their  habitual  position,  the 
over-extension  of  credit  would  at  once  be  cured, 
because  the  over-extension  of  credit  is  carried 
out  by  the  banks  which  do  not  issue  periodical 
statements,  or  prepare  for  them  by  calling  in 
loans.  Therefore,  say  the  advocates  of  reform, 
if  all  the  banks  agreed  to  make  monthly  state- 
ments showing  their  average  position,  not  the 
position  on  a  certain  day,  this  calling  in  of 
loans  when  publicity  is  applied,  and  over-extension 
of  loans  when  it  is  withdrawn,  would  be  made 
impossible.  Another  suggestion  with  high  autho- 
rity behind  it  and  probably  equally  efficacious, 
proposes  that  every  bank  should  make  a  weekly 
statement. 

It  is  pleasant  to  build  castles  in  the  air,  even  in 


280  THE  MEANING  OF  MONEY 

the  monetary  air,  and  in  spite  of  the  difficulties  in 
the  way  of  this  simple  reform,  let  us  see  how  it 
would  work,  and  what  effect  it  would  have  on  this 
question  of  the  gold  reserve. 

Its  immediate  effect  would  be  the  blotting  out 
of  a  certain  amount  of  credit  which  ought  not  to  be 
in  existence,  because  its  makers  themselves  con- 
sider it  advisable  to  blot  it  out  temporarily,  when- 
ever they  have  to  show  their  position.  This  effect 
would  be  inconvenient  to  the  users  of  this  credit, 
and  so  great  care  would  have  to  be  exercised,  and 
the  matter  would  have  to  be  dealt  with  cautiously, 
gradually,  and  after  due  notice. 

In  consequence  of  this  reduction  of  credit^Joaji 
rates  would  probably  be  temporarily  higher  and  dis- 
count rates  likewise.  The  trading  community  would 
find  the  process  of  financing  itself  rather  more 
expensive,  but  need  not  be  appreciably  Jincon- 
venienced.  The  experience  of  the  autumn  of  1906 
shows  that  trade  can  maintain  great  activity  with  a 
6  per  cent.  Bank  rate.  It  is  highly  important  in 
the  best  interests  of  trade  that  banking  credit 
should  be  soundly  based,  and  the  trader  is  obviously 
one  of  the  parties  who  ought  to  be  asked  to  con- 
tribute to  any  expense  that  may  be  involved  by 
the  improvement  of  its  basis.  The  Government 
might,  for  a  time,  have  to  pay  a  higher  rate  on  its 
Treasury  bills,  but  the  Government  again,  as  a  large 
and  continuous  user  of  credit,  ought  to  contribute. 


EFFECT  OF  PUBLICITY  281 

And  though  prophesying  about  economic 
processes  is  a  dangerous  amusement,  there  is 
every  reason  to  expect  that  the  higher  level  of 
rates  established  by  the  curtailment  of  credit 
would  very  quickly  provide  its  own  remedy  by 
the  attraction  or  retention  of  gold,  and  a  consequent 
increase  of  the  gold  basis  of  credit  resulting  in  its 
expansion  to  the  old  level..  After_Jthat_it  .would 
only  be  necessary  to  take  care  that  the  proper 
proportion  is  preserved,  and  this  ought  to  be 
easily  effected  by  means  of  the  publicity  which  we 
are  supposing  ourselves  to  have  secured,  especially 
if  at  the  same  time  a  link,  of  the  kind  suggested  in 
Chapter  XII.,  could  be  established  between  Bank 
rate  and  market  rate.  Bank  shareholders  as  a 
whole  need  suffer  no  loss ;  for  a  time  there  would 
be  less  bad  credit  made,  but  the  price  of  good 
credit  would  be  a  shade  higher,  and  this  shade 
would  probably  suffice  to  maintain  banking  profits. 
Shareholders  in  banks  which  have  never  traded  in 
bad  credit  would  probably  benefit,  and  the  banks 
which  have  relied  too  much  on  the  over-extension 
of  credit  for  making  profits  would  suffer  some 
temporary  loss,  but  ultimately  benefit  by  being 
induced  to  reform  their  methods. 

We  have  thus  arrived  at  the  conclusion  that  in 
order  to  improve  the  basis  of  credit  it  would  be 
desirable,  if  it  were  possible,  to  reduce  the  amount 
of  the  Bank  of  England's  fiduciary  note  issue  by 


282  THE  MEANING  OF  MONEY 

the  gradual  reduction  of  the  Government's  book 
debTTojther  Bank,  thug  making  tfrfe  bank-note, 
which  is  itself  jrrH  HS  faeh  *nt\  a  haais  <&  credit, 

more  a  bullion  certificate  and  less  a  credit 
instrument.  But  we  dismissed  this  as  impracticable, 
at  present,  owing  to  Parliamentary  and  political 
reasons  and  suggested— or  repeated  a  suggestion 
that  has  high  practical  authority  behind  it — that 
muclxmightbe  done  if  it  were  possible  to  curtail  the 
supply  of  bad  credit  by  inducing  all  the  banks  to 
show  how  much  cash  they  habitually  hold  in  pro- 
portion to  their  liabilities.  And  we  showed  some 
reason  to  believe  that  these  measures  would 
promptly  increase  the  gold  reserve,  which  is  the 
metallic  basis  of  credit,  so  enabling  good  and  well- 
based  credit  to  take  the  place  of  the  bad  and  inflated 
credit  that  had  been  abolished. 

As  the  gold  came  in  attracted  by  the  higher 
discount  rate  the  balances  of  the  other  banks  in 
the  Bank  of  England  would  be  increased;  or  if 
they  preferred  to  increase  their  own  cash  holdings, 
they  could  take  out  bank-notes  to  hold  in  their 
tills,  leaving  the  gold  on  which  they  were  based  in 
the  vaults  of  the  Bank  of  England.  For  it  seems 
desirable  that  the  strengthened  gold  reserve  should 
be  patent  to  the  world,  and  it  would  be  so  more 
effectively  if  aggregated  in  the  Bank  of  England 
than  if  scattered  about  in  the  vaults  and  tills  of  the 
other  banks. 


THE  WORKING  OF  THE. PROCESS    283 

If  once  the  apparently  insuperable  obstacles  in 
the  way  of  putting  these  measures  into  effect  could 
be  overcome,  the  process  would  work  quickly, 
cheaply  and  effectively.  And  it  need  not  be  carried 
very  far.  England  has  no  need  to  heap  up  a 
mountain  of  gold.  Our  banking  system  is  happy 
in  the  possession  of  other  reserves  besides  its 
metal,  and  with  them  we  shall  deal  in  the  next 
chapter. 


CHAPTER  XV 

OTHER  RESERVES 

IT  has  been  necessary  to  lay  a  good  deal  of  stress 
on  the  necessity  for  an  adequate  proportion  of 
gold  among  the  assets  held  by  bankers  against 
the  credits  that  they  create  for  their  customers, 
because  in  times  of  crisis  gold  is  the  only  com- 
modity that  is  of  universal  acceptance,  because  it 
is  the  essence  of  the  English  banking  system  that 
all  demands  are  payable  immediately  in  gold,  and 
because  a  large  holding  of  gold  is  thus  the  strongest 
evidence  that  a  bank  can  show  of  its  readiness  to 
meet  its  engagements. 

Nevertheless,  it  must  not  be  inferred  that  a 
high  proportion  of  gold  is  the  only  necessity,  or 
is  by  itself  sufficient  for  safety  in  banking.  The 
national  banks  in  certain  cities  of  the  United 
States  are  bound  by  law  to  keep  a  proportion  of 
25  per  cent,  of  their  deposits  in  gold  or  legal  tenders, 
a  higher  proportion  than  any  of  our  banks,  except 
the  Bank  of  England,  think  it  necessary  to  show. 
And  the  United  States  has  recently  suffered  from 
a  panic  in  which  its  banks  made  no  attempt  to 
meet  their  liabilities,  and  their  high  proportion  of 


THE  AMERICAN   EXAMPLE  285 

cash  did  not  save  them  from  demands  which  they 
were  quite  unable  to  meet.  It  is  no  part  of  the 
task  now  attempted  to  trace  the  causes  of  this 
remarkable  panic,  but  it  was  certainly  not  accounted 
for  by  lack  of  cash  in  the  banks,  though  Mr.  Mead's 
article  in  the  Atlantic  Monthly  of  February,  1908, 
already  referred  to,*  has  shown  how  the  legal  limit 
on  the  cash  proportion  of  the  national  banks  had 
been  stultified  by  the  growth  of  state  banks  which 
deposited  part  of  their  reserves  with  the  national 
banks,  so  that  a  pyramid  of  banking  credit  had  been 
built  up  on  a  cash  reserve  which  had  shown  a 
steadily  diminishing  proportion  to  it. 

Lack  of  cash,  though  it  did  not  cause  the  panic, 
thus  appears  to  have  been  an  important  reason 
for  the  helplessness  with  which  American  banking 
succumbed  before  it.  The  more  immediate  influ- 
ence which  produced  it,  however,  would  seem  to 
have  been  a  conviction  in  the  mind  of  the  American 
public  that  the  other  assets  held  against  the  de- 
posits of  the  United  States  banks  had  not  been 
judiciously  selected. 

A  dreary  procession  of  scandals,  disclosures, 
and  revelations  had  shown  that  the  methods  of 
American  finance  had  been  in  many  ways  ques- 
tionable, and  the  suspicion  had  gone  abroad  that 
the  banks  had  been  too  closely  connected  with 
these  undesirable  performances,  and  also  that  their 
*  Page  81. 


286  THE  MEANING  OF  MONEY 

investments  and  loans  had  been  arranged  to  suit 
the  convenience  of  groups  of  operators  interested 
in  Stock  Exchange  speculations.  In  the  case  of 
most  of  them  the  suspicion  was  probably  ground- 
less, but  in  banking  matters  the  public  does  not 
easily  discriminate,  and  the  good  banks  and  the 
bad  fell  under  the  same  ban. 

In  England  such  a  development  as  the  control 
of  a  chain  of  banks  by  a  gambling  group,  and  the 
use  of  the  banks'  credit  to  further  the  group's 
gambling,  is  impossible.  And  the  chief  reason 
why  we  can  bank  with  a  comparatively  small  cash 
proportion,  and  with  no  legal  obligation,  is  because 
English  banking — in  the  expressive  phrase  of  an 
American  who  recently  discussed  the  matter  with 
me — "works  with  a  psychological  reserve,"  that 
is  to  say,  has  won  and  keeps  public  confidence  by 
means  of  the  character  of  our  bankers.  It  is  be- 
cause they  are  so  sound,  so  straight,  so  sensible — 
from  an  American  point  of  view,  so  unenterprising 
— that  they  are  able  to  build  a  bigger  credit  fabric 
on  a  smaller  gold  basis,  and  even  to  carry  this 
building  to  a  height  which  they  themselves  have 
decided  to  be  questionable.  This  psychological 
reserve  is  the  priceless  possession'that  has  been 
handed  down  through  generations  of  good  bankers, 
and  every  individual  of  every  generation  that 
receives  it  can  do  something  to  maintain  and 
improve  it. 


THE  REST  OF  THE  ASSETS  287 

A  high  cash  proportion  is  of  little  avail  ifjhe 
rest  of  the  assets  consist  of  securities  which  cannot 

readily  be  realized,  of  advances  to  insolvent  cus- 
tomers against  insufficient  collateral,  of  bills  of 
exchange  drawn  against  anticipations  of  produce 
that  may  some  day  have  a  market,  or  of  loans  on 
real  estate  of  great  promise,  but  of  problematical 
value  if  offered  for  immediate  sale.  The  securities 
that  a  bank  can  hold  among  its  assets  are  com- 
paratively few ;  and  the  best  of  them,  as  has  been 
frequently  pointed  out,  are  genuine  bills  of  exchange 
representing  real  produce  of  universal  demand 
moving  into  consumption. 

Such  bills  pay  themselves  on  maturity.  The 
stocks  dealt  in  on  the  Stock  Exchange,  which  have 
to  find  a  purchaser  before  they  can  be  turned  into 
cash,  are  thus  in  quite  a  different  category,  and  it 
is  only  the  best  and  most  readily  negotiable  of  them 
that  can  really  be  considered  by  a  banker  either 
as  an  investment  or  as  collateral  security  for  a 
loan.  It  need  hardly  be  said  that  the  fuller  the 
extent  to  which  securities  meet  the  requirements 
of  the  austere  banking  ideal,  the  less  the  yield 
upon  them  will  be,  so  that  prudence  and  profits 
seem  at  first  sight  to  point  out  different  paths. 
And  the  possibility  looks  so  extremely  remote  of 
any  sudden  application  of  the  test  of  ready 
negotiability  to  banking  assets,  that  the  temptation 
to  earn  better  profits  by  neglecting  the  dictates 


288  THE  MEANING  OF  MONEY 

of  the  strictest  prudence  ipiist  often  be  almost  irre- 
gistible.  Whether  they  work  for  themselves  or 

for  shareholders,  bankers  are  naturally  impelled 
to  try  to  earn  good  profits ;  a  big  dividend  is  so 
satisfactory  an  end  to  a  half-year's  work,  and  makes 
the  shareholders'  meeting  so  complacently  com- 
plimentary and  contented,  that  it  must  be  difficult 
for  bankers  to  remember  that  the  strength  of  the 
bank  is  the  first  and  last  consideration,  and  the 
manner  in  which,  on  the  whole,  our  bankers  do  so, 
is  a  remarkable  exercise  of  patience. 

They  are  doubtless  fortified  by  the  reflection 
that  the  extremely  remote  possibility  of  the  appli- 
cation of  the  test  of  ready  negotiability  to  banking 
assets  is  one  of  those  occurrences  which  appear 
when  least  expected,  and  that  the  connection  which 
international  finance  establishes  between  all  the 
countries  of  the  world  makes  an  outbreak  of  mis- 
trust anywhere  else  a  cause  of  possible  trouble 
everywhere,  so  that  the  area  of  possible  disturbance 
has  been  enormously  widened.  It  is  all  to  the 
good  that  the  American  crisis  of  1907  passed  by 
without  the  smallest  appearance  of  an  inclination 
on  the  part  of  the  English  public  to  take  money 
from  the  banks  and  hoard  it,  and  it  is  pleasant  to 
record  that  the  Governor  of  the  Bank  of  England, 
in  a  speech  at  an  annual  bankers'  dinner  delivered 
in  July,  1908,  paid  a  handsome  compliment  to  the 
manner  in  which  English  bankers  had  met  the 


THE  AMERICAN   CRISIS  289 

crisis,  and  had  carefully  avoided  the  mistake  that 
is  sometimes  committed  by  bankers  in  troublous 
times  of  calling  in  credits,  and  so  creating  an 
atmosphere  of  mistrust. 

Nevertheless,  now  that  that  difficult  corner  has 
been  successfully  turned,  and  the  business  of  credit- 
making  goes  on  as  if  it  had  never  existed,  there  can 
be  no  harm  in  pointing  out  that  the  danger  was 
nearer  and  more  real  than  was  pleasant.  An  in- 
judicious word  in  a  newspaper  might  have  sufficed 
to  start  the  mischief,  and  it  was  within  measurable 
distance  of  starting  by  itself.  At  least,  a  friend 
of  mine — a  solicitor  of  seasoned  experience,  and  of 
a  most  unexcitable  and  unhysterical  temperament 
— told  me  one  Sunday  morning  in  the  course  of 
the  crisis  that  he  did  not  at  all  like  the  look  of 
things,  and  that  he  was  thinking  of  withdrawing 
from  his  bank  a  large  amount  of  clients'  funds  for 
which  he  was  responsible.  The  chief  influence 
which  restrained  him  was  the  difficulty  of  knowing 
what  to  do  with  the  money,  and  in  what  form  to 
take  it.  The  alternatives  that  suggested  themselves 
to  him  were  opening  an  account  with  the  Bank  of 
England,  putting  Bank  of  England  notes  away  with 
a  safe  deposit  company,  or  in  his  strong  room  at 
the  Law  Society,  or  burying  gold  in  his  back 
garden.  While  he  doubted  between  these  courses 
the  financial  sky  cleared,  and  he  finally  did  nothing. 
But  if  one  man  of  strong  common-sense  and  most 

u 


29o  THE   MEANING  OF  MONEY 

conservative  habit  of  mind  was  pondering  these 
possibilities,  it  is  more  than  probable  that  many 
others  were  doing  likewise ;  and  if  the  lessons  of 
the  American  crisis  are  taken  as  meaning  that 
English  banking  is  so  secure  in  the  confidence  of 
its  home  customers,  that  no  infection  of  external 
trouble  need  be  feared,  bankers  are  laying  a  flat- 
tering unction  to  their  souls.  In  fact,  it  demon- 
strated once  more  the  perennial  need  for  all  the 
safeguards  with  which  good  banking  can  surround 
itself,  adequate  cash  reserves,  and  careful  selection 
of  the  rest  of  the  assets  held  against  deposits  with 
a  view  to  readiness  of  realization. 

Another  reserve  possessed  by  English  banking, 
which  enables  it  to  work  with  a  smaller  cash  re- 
serve than  is  considered  necessary  in  other  coun- 
tries, is  the  fact  that  its  gold  is  not  locked  up  and 
protected  by  artificial  means,  but  is  immediately 
at  the  service  of  the  first  comer  who  presents  a 
valid  demand  on  it.  It  seems  paradoxical  that  this 
unprotected  state  of  the  English  gold  store  should 
enable  us  to  do  business  safely  with  less  of  it,  but 
it  is  literally  true,  because  the  practical  result  is 
that  gold  flows  readily ,^to  London,  when  London 
signals  for  it  with  a  high  discount  rate,  since  every 
one  knows  that  gold  which  goes  to  London  can 
be  got  back  again.  And  the  benefit  that  London 
confers  on  international  banking,  by  providing 
this  most  useful  facility  of  always  obtaining  gold, 


FOREIGN   CUSTOMERS'   INTEREST      291 

makes  it  most  important  for  international  banking 
to  take  care  that  London  is  not  overstrained  by 
performing  this  function.  Because  if  these  facilities 
that  are  given  by  London  alone  did  not  exist,  the 
whole  machinery  of  international  banking  would 
be  thrown  out  of  gear.  Consequently,  if  a  crisis 
became  so  severe  that  London  had  to  restrict  its 
facilities  in  this  respect,  other  centres  which 
habitually  keep  balances  in  London  which  they 
regard  as  equivalent  to  so  much  gold — because  a 
draft  on  London  is  as  good  as  gold— would  find 
themselves  very  seriously  inconvenienced.  And 
it  thus  follows  that  it  is  to  the  interest  of  the  other 
centres,  which  trade  on  these  facilities  which  London 
alone  gives,  to  take  care  that  London's  task  is  not 
made  too  difficult.  This  interest  is  especially  strong 
in  the  case  of  the  foreigners  who  keep  a  balance  in 
London  which  is  borrowed.  London  is  continually 
lending  its  name  on  a  bill,  and  giving  credits,  which 
make  the  cash  of  international  transactions.  In 
times  of  crisis  it  can  cut  down  these  credits,  and 
call  in  loans  from  all  the  world.  This  power  is 
in  itself  a  reserve,  but  its  exercise  would  take  time, 
and  the  length  of  time  would  depend  on  the  ability 
of  our  foreign  debtors  to  get  gold  from  their  central 
b.anks.  But  the  fact  that  foreigners  habitually  owe 
us  large  sums  which  we  should  call  in  if  we  were 
pressed  makes  them  desire  to  save  us  from  being 
pressed. 


292  THE  MEANING  OF  MONEY 

Hence  comes  the  result  that  when  a  crisis  arrives, 
as  it  did  in  the  autumn  of  1907,  and  an  abnormal 
demand  for  gold  in  one  country  threatens  to  paralyze 
the  international  money  market,  the  task  of  pro- 
viding the  required  gold  falls  on  London  in  the 
first  place,  but  aL  other  centres  see  that  it  is  to 
their  interest  to  give  what  help  they  can,  and  to 
relax  some  of  the  restraints  and  restrictions  with 
which  they  protect  their  gold  stores.  In  fact 
London  drew  in  the  gold  required  for  New  York 
from  seventeen  other  countries.  It  must  not  be 
supposed  that  it  did  so  entirely  owing  to  the  good- 
will and  enlightened  self-interest  of  those  respon- 
sible for  the  currency  arrangements  of  other 
centres.  To  a  great  extent  the  suction  was 
compulsory,  and  arose  from  the  determined  use 
of  the  Bank  rate  pump  by  the  Bank  of  England 
and  also  from  the  fact  that  the  United  States-were 
selling  all  that  they  could  sell,  and  reducing  their 
purchases  to  a  minimum,  and  so  compelling  a  stream 
of  gold,  through  London,  to  themselves.  But  at 
the  same  time  there  can  be  no  doubt  that  the 
readiness  with  which  all  the  other  countries  pro- 
duced coins  and  bars  to  send  to  London  was 
greatly  assisted  by  the  knowledge  that  when  all 
was  over  London  would  certainly  send  back  their 
contributions  as  soon  as  they  were  in  a  position 
to  ask  for  them. 

Nevertheless,  satisfactory  as  were  the  results 


WHO  WOULD  TAKE  LONDON'S  PLACE  ?    293 

of  the  latest  crisis  in  showing  that  London's  power 
of  drawing  in  gold  is  at  least  as  strong  as  ever,  it 
is  not  safe  to  base  on  them  the  inference  that 
London  can  altogether  neglect  the  question  of  its 
gold  reserve  and  rely  entirely  on  always  being  able 
to  get  gold  in  from  other  centres  by  raising  its 
Bank  rate. 

In  the  first  place,  as  has  already  been  intimated, 
it  is  hard  to  be  certain  how  much  of  the  gold  obtained 
in  1907  was  brought  by  our  Bank  rate,  and  how  much 
by  the  action  of  American  finance,  which  called  in 
its  balances  through  London  all  over  the  world, 
and  created  new  ones  as  fast  as  possible  by  selling 
everything  that  it  could  turn  into  cash. 

In  the  second,  it  must  be  remembered  that  the 
crisis  of  1907  was  an  American  affair,  and  English 
banking  was  not  affected  by  the  smallest  breath 
of  suspicion.  But  if  England  had  been  the  centre 
of  disturbance,  instead  of  tfae  miqistftFJflg  pny»lr  it 
is  exceedingly  doubtful  whether  gold  would  have 
romp  in  as  freely  ft?  it  did.  None  of  the  other 
countries  were  willing  to  send  gold  to  New  York, 
which  was  the  storm  centre.  London  had  to  take 
the  whole  responsibility  for  doing  that.  And  if 
London  were  itself  the  storm  centre,  who  would 
there  be  to  take  its  place  and  responsibilities  ? 
Imagination  is  struck  dumb  by  the  contemplation 
of  what  would  happen  if  such  a  proposition 
were  presented  to  the  leaders  of  finance  in 


294  THE  MEANING  OF  MONEY 

other  centres,  and  of  the  well-meant  suggestions  for 
international  conferences  and  international  clearing- 
house certificates  which  would  be  produced  and 
ventilated  as  palliatives  for  a  situation  which  would 
require  prompt  action,  and  the  placing  of  a  certain 
amount  of  gold  in  the  place  in  which  it  is  wanted. 

Ultimately,  and  after  delays  that  would  be  fatal. 
London  could  probably  compel  gold  imports  by 
sales  of  securities  and  commodities,  and  by  calling 
in  loans  from  foreign  customers,  but  in  the  meantime 
thejnischief  that  might  be  lyrought  is  incalciilah1pr 
and  the  mere  suggestion  of  the  possibilities  of 
the  position  shows  very  clearly  that  London  is  a 
monetary  physician  who  cannot  afford,  under  any 
circumstances,  to  be  sick.  The  confidence  of  its 
customers,  both  home  and  foreign,  is  an  asset  which 
enables  the  English  banking  system  to  provide  an 
astonishing  amount  of  credit  on  a  very  economical 
cash  basis,  but  this  confidence  can  only  be  main- 
tained and  secured  by  the  strictest  attention  to  the 
austerest  rules  of  banking  caution,  expressed  in  a 
continuous  strengthening  of  cash  reserves,  and 
increasing  vigilance  with  regard  to  the  soundness 
and  negotiability  of  the  other  assets  held  against 
/  liabilities. 


CHAPTER  XVI 

SUMMARY  AND  CONCLUSION 

AFTER  this  long  ramble  through  rough  country, 
it  is  perhaps  worth  while  to  review  and  sum  up 
the  conclusions  arrived  at  in  its  course. 

We  have  seen  that  gold  and  silver  were  the 
commodities  which  universal  acceptance  advanced 
to  the  position  of  being  taken  in  payment  for  all 
goods  and  services,  and  so  became  money  as  man 
emerged  from  the  state  of  barter. 

That  gold  finally  reduced  silver  to  a  secondary 
place,  and  is  now  the  only  metal  which  is  legal 
tender  in  England  in  payment  of  unlimited  amounts, 
our  silver  coins  being  mere  tokens,  current  by 
convention. 

That  banking  economized  the  use  of  gold  by 
the  issue  of  bank-notes,  payable  on  demand  in  gold 
by  the  issuing  bank. 

That,  after  a  period  of  much  groping  and  uncer- 
tainty concerning  the  principles  which  should 
regulate  the  note  issue,  the  law  laid  down  a  hard- 
and-fast  rule  which  stated  the  number  of  notes 
which  might  be  issued  in  England  against  securities, 


296  THE  MEANING  OF  MONEY 

ordaining  that  any  more  notes  required  by  the 
commerce  and  finance  of  the  country  must  be  based 
on  metal. 

That  this  restriction  of  the  basis  of  paper  money 
was  evaded  by  the  banking  community  by  means 
of  the  use  of  cheques,  drawn  against  banking 
credit ;  that  these  cheques,  though  payable  in  gold 
on  demand,  are,  to  an  overwhelming  proportion, 
met  by  book  entries,  and  crossed  off  against  one 
another  by  the  various  banks  through  the  mechan- 
ism of  the  Clearing  house ;  and  that  their  safety  and 
convenience  have  almost  ousted  the  bank-note  and 
caused  the  cheque  to  take  its  place  as  the  currency 
of  commerce. 

That  the  responsibility  for  the  manufacture  of 
currency  and  credit  has  thus  passed  into  the  hands 
of  the  banks,  which  carry  it  on  without  any  restric- 
tion except  that  dictated  by  their  own  discretion 
and  judgment. 

That  a  credit  system  has  thus  been  evolved  of 
extraordinary  elasticity  and  perfection,  so  perfect 
in  fact  that  its  perfection  is  its  only  weakness. 
This  weakness  arises  from  the  ease  with  which 
credit  and  currency  can  be  created  without  any 
relation  to  the  gold  basis  on  which  they  are  ulti- 
mately founded,  since  gold  is  still  the  only  form  of 
payment  that  is  certain  of  acceptance  everywhere 
in  times  of  crisis. 

That  this  multiplication  of  credit  increases  the 


DEVICES   SUGGESTED  297 

difficulty  of  maintaining  the  gold  reserve,  a  task 
which  has  been  entrusted  by  custom  and  common 
consent  to  the  Bank  of  England. 

And  though  this  book  is  intended  merely  as  an 
elementary  explanation,  and  not  a  criticism,  still 
less  an  attempt  at  construction,  we  have  amused 
ourselves  by  considering  some  of  the  many  devices 
suggested  by  which  the  admitted  inadequacy  of  the 
gold  basis  of  our  credit  manufacture  could  be  in- 
creased.   And  we  came  to  the  conclusion  that  the 
cheapest,  simplest,  and  most  efficacious  would  be 
(i)  the  establishment  of  a  connection — quite  elastic 
and    only  occasionally  operative — between    Bank 
rate  and  market  rate,  so  that  the  power  of  the  Bank 
to  influence  the  foreign  exchanges  should  not  have 
to  be  enforced  or  created  by  artificial  and  clumsy 
methods ;  and    (2)    greater    publicity  of   banking    -  */ 
accounts,  so  that  all  banks  should  periodically  show  _ 
their  position,  not  on  any  given  day,  but  on  the     ^ 
average  throughout  the  preceding  period.     By  this /^ 
means  it  was  hoped  that  much  of  the  over-extension  V 
of  credit  now  complained  of  would  be  abolished,  f 
and  it  might  be  possible  to  do  away  with  the  un- ) 
fairness  of  the  present  system  by  which  the  strong' 
prudent  banks  keep  a  strong  prudent  cash  reserve, 
and  their  weaker  brethren,  sheltered  behind  their 
strength,  carry  on  business  in  a  manner  which  they 
are  seemingly  reluctant  to  submit  to  the  test  of 
publicity. 


298  THE  MEANING  OF  MONEY 

Measures  of  this  kind  could  be  carried  out  by 
bankers  themselves,  without  any  Parliamentary 
interference  or  discussion,  which,  once  started, 
might  lead  to  unforeseen  and  undesirable  results. 
For  this  reason  we  dismissed  as  impracticable  a 
reform  which  is  theoretically  attractive,  namely, 
the  reduction  of  Bank  of  England's  fiduciary  note 
Issue. 

It  need  not  be  supposed  that  the  periodical 
statement  of  the  average  position  is  an  unheard  of 
and  revolutionary  principle,  as  applied  to  English 
banking.  The  Bank  Act  of  1844  provided  "that  a 
weekly  account  shall  be  sent  by  every  banker 
issuing  notes  to  the  Commissioners  of  Stamps  and 
Taxes,  of  the  amount  in  circulation  each  day  of  the 
week;  and  also  an  average  amount  of  the  said 
weekly  circulation ;  .  .  .  the  weekly  average  to  be 
published  in  the  London  Gazette"  Also  "  that  the  said 
Commissioners  shall  have  full  power  to  examine  all 
books  at  all  seasonable  times,  of  such  bankers  ,as 
issue  notes."  These  weekly  averages  appear  to 
this  day  in  the  London  Gazette,  but  the  ousting  of 
the  bank-note  by  the  cheque  has  robbed  this  effort 
by  Parliament  to  secure  publicity,  of  most  of  its 
intended  effect. 

We  have  seen  how  rough  and  heavy  a  hand 
this  same  Act  laid  on  the  delicate  banking  machine, 
prescribing  that  in  future  it  was  to  issue  no  more 
notes  except  against  metal,  and  so  taking  away  from 


THE  HEAVY-HANDED  ACT  299 

it  all  its  power  of  economizing  metal  by  the  use 
of  notes,  and  restricting  its  energies  to  printing 
bullion  certificates.  Happily  the  banking  machine 
was  able  to  evade  these  drastic  restrictions,  but  the 
manner  in  which  it  was  then  handled  should  serve 
as  a  reminder  to  those  who  now  manage  it,  that  it 
is  above  all  things  desirable  that  they  should  them- 
selves make  some  serious  attempt  to  carry  out  the 
reform  which  has  been  pointed  to  as  necessary  by 
leading  members  of  their  own  body. 


INDEX 


ACCEPT  AN  ct  39,  50,  60,  61,  160 

Accepting  Houses,  48,  160  £?tt?. 
Alison,  Sir  Archibald,  18 
Amenities,  as  exports,  189 
American  banks,  79,  80,  88  et  seq., 
284  et  seq. 

crisis  of  1907.     See  CRISIS. 

Argentine  dollar,  184 
Art  treasures,  as  exports,  189 
Assignats,  1 6 
Athenians,  16,  83 
Atlantic  Monthly ,  8l,  28$ 

BACKHOUSE,  no,  in 

Bagehot,  207,  211,  228,  249 

Balance-sheet,  59 

Balance  of  indebtedness,   179,    182, 

185 
Balance  of  trade,  1 86  et  seq. 

"unfavourable,"  sign  of  economic 
development,  187 

cannot  be  afforded  by  debtor 

country,  193 
Bank  Act  of  1844.. 28,  30,  31,  204, 

208,  209,  242,  243,  273,  298 
Bankers,  evolved  from  goldsmiths  and 

bullion  dealers,  24 
Institute  of,  263 

Banking  facilities,  as  exports,  188 
Bank  of  England,  199  et  seq. 
attempt  to  put  silver  beh/nd    its 

notes,  247 

Banking  Department,  243 
bankers'  bank,  200 


Bank  of  England,  continued— 
borrows  to  make  its  rate  effective 

228 

branches  of,  224 
British  Government's  bank,  199 
capital  stock,  247,  255 
cash  at,  basis  of  credit,  265,  266 
Committee  of  Treasury,  218 
compared  with  Bank  of  France, 

220,  221 

control  of  the  market  by,  334,  235 
credit  with,  regarded  as  cash,  147, 

203,  205,  207,  213 
discounts  at  market  rate,  224 
Directors  of,  216 
external  appearance  of,  214,  215 
foundation  of,  199 
functions  of  summarized,  212 
Government  securities  held  by,  256 
Governor  of,  218 
high  proportion  of  cash  held  by, 

208 

Issue  Department,  243  et  seq.,  260 
keeper  of  the  gold  reserve,  206, 

213 

liabilities  of,  as  basis  of  credit,  261 
management  of  American  crisis  by, 

IOO,  221 

monopoly  of,  119,  200 
nation's  bank,  199 
notes  of.    See  BANK-NOTE. 
official  rate  of.    See  BANK  KATE. 
organization  of,  215  et  seq. 
open  to  borrowers,  93, 205 


302 


INDEX 


Bank  of  England,  continued— 
Other  Deposits    with,   252,    253, 

255 

Other  Securities,  held  by,  258 
prevented  from  increasing  reserve 

by  other  banks'  operations,  239 
provider  of   emergency  currency, 

201,  213 

credit,  146 

Public   Deposits   with,  249,  250, 

255 

reserve,  239,  260  et  seq. 
Rest,  248,  249,  255,  260 
return,  242  et  seq. 
seven-day  and  other  bills,  255 
Bank-notes,  24  et  seq.,  295 
Bank  of  England's,  28,  29,  199,  203 
based  on  paper  to  the  extent  of 

one-third,  265 
basis  of  credit,  57,  282 
fiduciary,  245,  274,  281 
gold  as  basis  of,  246 
Government    debt  as    basis  of, 

245,  273 
legal  tender,  29 
silver  as  basis  of,  246,  247 
strength  of,  29,  30 
Bank  of  France.     See  FRANCE. 
Bank  Rate,  222  et  seq. 
connecting  link  with  market  rate, 

240,  297 
conditions  which  make  it  effective, 

234 
disconnection  from    market    rate, 

23S»  237 

effect  of,  in  1907 . .  292 
"effective,"  223 
formerly  always  effective,  228 
made  effective  by  borrowing,  228 
often  ineffective,  211 
Banks,  American,  79,  80,  88  et  seq., 

103,  284  et  seq. 
Colonial,  165 


Banks,  contimud — 
English,  107  et  seq. 

acceptances  of,  60,  131,  l&^etseq, 

balance-sheet,  59 

balances    of,   at    the    Bank    of 

England,  229,  230,  252,  253. 
branch  offices  of,  120,  121 
cash  reserve  of,  78,  115 
confidence  of  public  in,  81,  286, 

294 
co-operation   of   with    Bank  of 

England,  desirable,  241 
current  accounts  with,  61,  124 
debt  of  to  the  public  created  by 

loans,  62,  266 
dependent  on  the  public's  sanity, 

75.  i°3 

deposit  accounts  with,  57,  6 1,  124 
discounters  of  bills,  129 
effect  of   operations  of,  on  the 

Bank's  reserve,  239 
failures  among,  109 
loans  by  to  the  Stock  Exchange, 

131  et  seq. 

regulate  the  market  rate  of  dis- 
count, 129 

price  of  money,  123 

responsible  for  extension  of  credit, 

276,  279 

Foreign,  171  et  seq. 
Indian,  165,  166 
Barclay  &  Co.,  I2O 
Barter,  10,  n 
Berlin,  87,  94,  101,  239 
Bimetallism,  22,  220,  247 
Bill  of  exchange,  31, y]  et  seq.,  174, 175 
acceptance  of,  39,  50 
anticipatory,  48,  191 
antiquity  of,  39,  40 
as  an  investment,  46,  135,  157 
contrasted  with  mortgage,  47 
distinguished  from  cheque,  38 
finance,  49,  53, 128 


INDEX 


303 


Bill  of  Exchange,  continued — 

"  House,"  53 

imports  and  exports  of,  196 

legal  definition  of,  40 

space  an  element  in,  41 

specimens  of,  51,  52 

time,  an  element  in,  41 

Quixote's  bill  of  ass-colts,  41 
Bill  brokers,   124,    125,   138  et  seq., 
211,  230,  231,  238,  240,  251,  271 
Bonds,  drawn,  as  exports,  193 

sales  of,  as  factor  in  exchange,  194 
Branches,  banking  by,  120,  121 
Brazil,  effect  of  loan  by  on  exchange, 

192,  193 
Bronze,  9,  22 
Bullion,  12, 

dealers,  14 

market,  269,  271,  274 

settles  balance  of  indebtedness,  191 
Byles,  on  bills,  39 

CARLYLE,  n,  169 
Cash,  coined,  9  et  seq. 
gold,  9  et  seq. 
money  here  and  now,  8 
paper,  z^etseq. 
Cash  Reserve,   fixed  by  law  in  the 

United  States,  79 
lack  of,  an  element  in  the  American 

crisis  of  1 907.. 80 
Lord  Goschen  urges  increase  of  in 

England,  115 
Chambers  of  Commerce,  and  Bank  of 

France,  220 
Cheque,  31  et  seq. 

based  on  legal  tender  cash,  77 
distinguished  from  bill  of  exchange, 

38 

immediately  convertible,  34,  77 
met  by  book  entries,  296 
not  legal  tender,  33 
*'  not  negotiable,"  34 


Cicero  on  exchange,  40 
Clearing  house,  34,  185 
Coined  cash,  9  et  seq. 
Colonial  banks,  165 
Confidence,  an  asset  of  English  bank- 
ing, 81,  286,  294 
Consols,  133,  134,  226,  249 
Continental  banks,  166,  171 
Coupons,  as  exports,  1 88,  193 
Credit,  bank-notes  as  basis  of,  57 
Bank  of   England's    liabilities   as 

basis  of,  261,  265 
cash  at  Bank  of  England  as  basis 

of,  265,  266 
consists  of  the  right  to  draw   a 

cheque,  57 

credit  as  basis  of,  264 
gold  as  basis  of,  9,  17,  21,  36,  8 1, 

82,  263,  266  et  seq. 
goods  and  securities  as  basis  of,  81 
inadequacy  of  metallic  bfcsis  of,  263 

ttttq. 
manufactured  by  bankers  and  their 

customers,  72 

Other  Deposits,  as  basis  of,  252,  261 
undue  extension  of,  263,  271,  276, 

279 
Crisis  of  1907..  100,   102,  221,288, 

292 

Bank  of  England  and,  100,  221 
English  bankers  and,  289 
of  1890. .115,  210 
Currency,  bad  drives  out  good,  12 
bank-note  as  basis  of,  273 
chaotic  state   of,  in  Middle  Ages, 

13 

cheque,  based  on  mutual  indebted- 
ness, 62 
coined,  9  et  seq. 
commodities  used  as,  II 
emergency,  201,  213 
note,  24  et  seq. 
Current  account,  61,  124 


304 


INDEX 


DAYS  of  grace,  44,  50 
Deposit  account,  61,  62,  124 
Deposits,  with  discount  houses,  140 

with  banks,    cancelled    by  repay- 
ments, 71 

• created  by  loans,  64  et  seq. 

payable  in  cash,  75 

rate  allowed  on,  62,  123,  237 

regarded  as  evidence  of  wealth, 

57 

Discount,  44,  143  et  seq. 
Discount  houses,  138  et  seq. 
Discount  rate,  effect  of,  in  exchanges, 

196,  226,  229,  231,  237,  238 
higher,  required  to  attract  gold,  271, 

275 

low,  sends  gold  abroad,  239 
Dollar,  American,  175,  176 

Argentine,  184 

Dowries,  an  item  in  international  in- 
debtedness, 189 
Draft,  6,  31,  1 88 

on  London,  convertibility  of,  222 
Drawn  bonds,  as  exports,  193 

ECONOMIST,  167 

Elasticity  of  English  system,  93,  296 

leads  to  lack  of  cohesion,  227 
Emergency  currency,  201,  213 
Exchange,  £,  6,  173  et  seq. 

affected  by  discount  rate,  196,  226, 
229,  231,  237,  238 

between  London  and  Paris,    174, 
181 

Sydney,  175  et  seq. 

effect  of,  on  demand  for  gold,  178 
et  seq, 

favourable,  176  et  seq. 

rates  of,  173 
Exports,  186  et  seq. 

FAMILY  affection,  as  export,  189 


Fiduciary  note  issue,  245 
suggested  reduction  of,  274 

Finance  bills,  49,  52,  128 

First  of  exchange,  52 

Flocks  and  herds,  measure  of  wealth, 
10 

Foreign  banks,  1 66,  171 

Franc,  181  et  seq, 

France,' limited  convertibility  of  notes 

in,  87 

ready  market  for  the  borrower,  92 
unfavourable  trade  balance  of,  187 

France,  Bank  of,  87,  94 
protected  by  option  of  payment  in 

silver,  220 
sends  gold  to  London,  221 

Frederick  the  Great,  169 

Freights,  as  exports,  188 

GERMANY,  87,  94,  187 

German   trade    and  English  credit, 

166  et  seq. 

Glyn,  Mills,  Currie  &  Co.,  124/1. 
Gold,  9  et  seq, 

accumulated  supply  of,  1 6 
attracted  by  high  discount  rate,  271, 

275 
basis  of  credit,  9,  17,  21,  36,  81, 

82,  263,  266 
basis  of  note  issue,  246 
coined,  9  et  seq. 
convertibility  into,  of  the  draft  on 

London,  222 
demand    for,    falls    on    Bank    of 

England,  262 
—  depends  on  exchanges,  178  et 

seq. 

economized  by  paper,  23,  295 
goes  to  agricultural    countries  at 

harvest  time,  191 
increase  in  store  of,  recognized  as 

desirable,  236,  271 
India,  regular  buyer  of,  269 


INDEX 


305 


Gold,  continued — 
legal  tender,  9,  295 
medium  of  exchange,  9 
normal  effect  of  increased  supply 

of,  19,  20,  271 
point,  1 80 
reserve,  263  et  stq. 
sent  abroad  by  low  discount  rate, 

239 

settles  international  trade  balance, 

185 

shipments   of,  reduced   by  antici- 
patory bills,  192 
standard  in  England,  22 
statue  of  Athene,  overlaid  with,  16 
statutory  price  of,  269 
steadiness  of,  in  value,  14,  15 
universal  acceptability  of,  16,  17, 

295 

variations  in  amount  of,  18,  19,  82 
value  of  not  fixed,  14,  15 
weekly  arrivals  of,  269 
Goldsmiths,  early  bankers,  34 
and  the  bullion  market,  269 
Goschen,  Lord,  115 
Government,    as    factor    in    money 
market,  150,  152,  153,  235,  250, 
251,  256 

user  of  credit  machine,  272 
Government  Debt  to  Bank  of  England, 

basis  of  note  issue,  245,  273 

suggested  repayment  of,  245,  274 

Government      securities,     in      Bank 

return,  257 
Gresham's  Law,  12,  14,  22 

HOARK  &  Co.,  124  «. 
Homer,  10 

INDIA,  regular  buyer  of  gold,  269 
Indian  banks,  165,  1 66 
Indian  Government,  127 


Insurance  facilities  as  exports,  188 

Interest,  rate  of,  4 

Interest    coupons,   as    exports,    188, 

193.  194 
International  banking,  dependent  on 

London,  291 

Italy,  economic  progress  of,  194 
exporter  of  Beauty,  195 
has  bought  back  her  debt,  195 

JAPAN,  92,  166,  167 
Johannesburg,  269,  271 
Joint-stock  banking,  112,  119,  120 
discount  houses,  141 

KINE,  circulation,  12 

standard  of  ralue,  IO 
"Kites,  "43 

LEGAL  tender,  9,  21,  33,  34,  77,  295 
Loan  issue,  influence  on  exchange, 

192  et  seq. 
"Lombard   Street,"  Bagehot's  207, 

211,  228,  249 
London  and  County  Bank,  publishes 

average  cash  holding,  117 
London,    importance    of,    to    inter* 

national  finance,  85  et  seq,,  291 

et  seq. 
London  and  Westminster  Bank,  120 

MEAD,  F.  S.,  81,  285 

Mercantile  system,  83 

Mint,  14 

Money,  book-keeping  credits,  58 

cost  of  production  of,  233 

different  senses  of,  2 

leather,  n 

paper,  II 

market,  3,  4 

some  day,  4,  7 

somewhere  else,  5,  7 

Special  City,  meaning  of,  125 
X 


306 


INDEX 


Mutual  Indebtedness,   basis  of  cur- 
rency, 25,  27 

NEW  South  Wales,  174 
New  York,  88  et  seq.,  I  co,  102 
"  Not  negotiable,"  34 
Notes,  Bank,  24  et  seq.,  295.     See 
BANK  OF  ENGLAND. 

cash,  backing  of,  27,  28 

goldsmiths',  24 

suggested  issue  of  £1,  268 

OLD  TESTAMENT,  10 
Other  Deposits,  252 
Ox,  as  currency,  1 1 
standard  of  value,  1 1 

PANGLOSS,  Dr.,  119 
Panic,  effect  of,  76 
Paper  cash,  23  et  seq. 

money,  n,  23 

Paris,   92,    101,    174,    181    et   seq., 

239 

Pecunia,  II 
Pecus,  II 

Pleasure,  as  export,  189 
Post-Office  Savings  Bank,  272 
Public  deposits,  249  et  seq. 
Publicity  in  banking,  74,  113  et  seq., 
278,  281,  297 

QUIXOTE,  draws  a  bill,  41 

RATE  of  interest,  4 

— —  a  factor  in  exchange,  181,  183 

Regulation  of  money  market  essential, 

232 

arranged  by  Bank  Act,  234 
Renaissance,  19 

Reserve,  Bank  of  England's,  260 
constituted  by  free  convertibility, 
290 


Reserve,  continued — 

gold,  263  et  seq. 

psychological,  286 
Rest,  Bank  of  England's,  248,  249, 

255 

Roman  Empire,  fall  of,  19 
Running  broker,  139 

SAVINGS  bank,  268,  272 

Second  of  exchange,  52 

Seddon,  Mr.,  187 

Securities,  movements  of,  as  factor  in 
exchange,  192  et  seq. 

Seven-day  and  other  bills,  255 

Sinking  fund,  274 

Silver,  9,  19 

coins  mere  tokens,  22,  295 
currency  and  exchange,  185 
fixed  ratio  with  gold,  21,  22,  247 
legal  tender  up  to  £2,  21 
may  be  used  as  basis  of  Bank  of 
England  notes,  29,  246,  247 

Sixty  days'  sight,  44 

Smith,  Adam,  112 

South  African  mines,  269 
war,  91 

Sovereign,  advantages  of,  12,  13 

Stickney,  A.  B.,  on  English  banking, 
98 

Stock    exchange    and     the    money 

market,  153 

bankers'  loans  to,  131,  132,  211 
securities,  limited  readability  of, 
134,  287 

TARIFFS,  169,  188,  189 

Taxpayer,  and  gold  reserve,  268,  275 

Tax-payments,  effect  on  money  market, 

152,  234,  2$oetsey. 
Times,  247 

Titles,  as  exports,  189 
Trade,  and  the  money  market,  l$I, 

280 


INDEX 


307 


Trade,  balance  of,  186  et  seq. 
Traders',  grievance  against  banking 

system,  100,  170,  171 
Trust,  80  «. 
Trust  Co.,  Son.,  273  n. 

UNION  of  London  and  Smith's  bank, 
124  ».,  264 


United  States,  79,   88  et  stf.t    188 
et  seg.t  284 

WABASH,  86 

Weather  and  the  money  market,  151, 

152 
Wheat,  more  variable  in  value  than 

gold,  15 


THE  END 


PRINTED  BY  WILLIAM  CLOWES  AND  SOUS,   LIMITED,   LONDON    AND  SBCC'^S 


A     000019092     6 


